In this interview, David Sacks and Jason Lemkin discuss the shifting economics of early‑stage venture investing. Sacks argues that seed rounds no longer offer the best risk‑adjusted returns and that Series A or B investments now provide a better balance of proof and valuation, especially as investors have become more skeptical and valuations for incremental proof have softened. They explore a market correction that began in late‑stage rounds (Series C and B) when crossover investors exited, causing liquidity to dry up and trickle down to earlier stages, though the correction may not yet be fully reflected in seed deals. Lemkin adds that founders with strong pedigrees (e.g., ex‑Stripe, ex‑Yammer) are less affected by the correction. The conversation then shifts to the concept of “low‑margin SaaS,” which Lemkin describes as an oxymoron. Sacks explains that software’s high gross margins stem from its IP nature—once the product is built, additional copies cost virtually nothing, making low‑margin SaaS businesses fundamentally contradictory unless they involve payment processing or other low‑margin components. The dialogue highlights the importance of understanding valuation multiples, mortality rates between funding stages, and the economics of SaaS margins for investors and founders alike.
Chapters
I'm no longer convinced that seed is particularly like a bargain in terms of that part of the market. In fact, I think probably Series A or Series B is a better place to invest. I think the question is always the trade-off between proof and how much proof do you want as an investor versus the extra valuation that you have to pay up for that. And I think that, you know, a couple of years ago, you'd have to pay up a ton for that incremental proof because it just, you know, felt like the valuations would just, you know, hockey stick as soon as anything seemed to be working.
Yeah.
And now I think investors are more skeptical and I think you don't have to pay as much to get a little bit more proof. And so I think it's okay to wait basically just incrementally.
Yeah. If you can't— I mean, that's the paradox for all of it for founders that you would wait if you could. When I started, the lesson I was taught is from seed to A, the valuation needs to at least double, but ideally triple, not to be fancy or to look good on paper, but to justify the risk. Because if you have enough money and Kraft has enough money, you might as well wait. I'll pay 2x the price for a tenth the risk. That's the biggest bargain in the world, isn't it?
Yes. I think that's right. If it is an 80% mortality rate from seed to Series A, Series As need to be, what is that, 5 times?
The math just says like—
The math doesn't work, right? It doesn't. I think there has been a correction. The correction evaluation started with the super late-stage stuff, because what happened is the crossover investors who had come into the market like the Tigers and so on, they just got their faces ripped off, so they basically just got out of of the market. And so the super late-stage rounds is where liquidity just dried up, and then it started trickling down. And so, you know, first Series C was hard, and then Series B got hard. I mean, everyone who's kind of around earlier can look forward and see, oh, wait a second, there's no one to market my deal anymore. I better be like really conservative.
Yeah.
And it trickles all the way down, but seed obviously is the last round for it to trickle down to. And I'm not sure it's like fully corrected.
Yeah, I don't. I think folks here may feel that. I actually think here in like the virtual Bay Area where you have multiple successful founders with lots of money, I don't think it's corrected at all for the, for the haves. Right. For the, for the ones with the right resumes that, that came out of Stripe or came out of Yammer or came out of wherever they— there's no impact. Yeah, there's still a surplus of folks who in many cases are gentle people, investors, and they don't care.
Right.
All right. Two things I want to hit on this slide. Maybe we lost it up front. If we could bring it back. There's a lot, but these are things I know you've thought about. So we talked at the beginning, 80% of crafts, thinking about AI, other things that got exciting and maybe are less today. Let's talk about the second one first. Low margin SaaS, right? And, and you've done plenty of stuff in fintech and combination over your career. I still get confused when I meet with a founder with a 30% or 40% margin business.
Yeah.
How, how are you thinking about this today? It seemed like a perfect thing in 2021 to bolt on a low-margin payments business to anything, didn't it?
Yeah, I mean, I would say to me, when I hear the term low-margin SaaS, that sounds like an oxymoron.
Like, it is an oxymoron.
Software is supposed to be high margin. Um, the, the insight that made Bill Gates the richest man in the world is he realized he could mass-produce software, so at a low cost, right?
Because I don't know how he got away from that. You put a floppy disk or a CD-ROM, you print it, you distribute it to 10 million people, and it's cash.
It's an IP business, meaning that all the expense in creating the software goes into producing the first instance or the first copy of the software. Making additional copies of it is on the margins free. The more of it you can sell, the more lucrative it is. That's the definition of gross margin.
