Redpoint Ventures Market Overview with Logan Bartlett, Managing Director

Good morning, everybody. Drop in the chat where you are tuning in from. We always like to see the different cities and countries and time zones that are following around the world. Got more people coming in. So thanks again for joining us. As everyone knows, this— we are here every Wednesday at 10:00 AM to roll through some super interesting content and of course give you access to ask our incredible speakers any questions that you have for them. We are thrilled that this morning we've got Logan Bartlett. He's the managing director at Redpoint Ventures. Logan and his team put together a market overview every year, so we're going to hear the latest from them and just in terms of what we're seeing. So we've been lucky to have a couple venture perspectives on the Workshop Wednesday the past few weeks and next. So excited to have Logan here and hear his findings and what's going on in the market. We will, of course, have plenty of time for questions, so drop them up into the chat so we can get you in the queue, and then we'll invite you on stage once Logan Logan runs through his slides. We all know that we like to start asking our speaker some questions so we can get to know them a little bit better. So Logan, first off, welcome and thanks for joining us.

Thank you for having me.

All right, tell us about one of your investments that you or the firm made in the past year that you're really excited about.

In the past year, I will plug, well, we love all our children equally, but I guess The most recent investment I made was in a company called Scribe. I think their website is scribehow.com. I imagine some people on this call use it, but basically it is a process documentation company. So you can install it as a Chrome extension and you can build step-by-step guides of how to do anything within an organization. So if you wanted to show someone how to log into the HR portal or use some CPQ functionality in Salesforce or find a folder within a G drive or something. It's a very simple, elegant Chrome extension that allows you to do all that and then can serve as a knowledge repository for different processes within your business.

Technical. Love it. Exciting and one to watch for sure to see how that takes off. I'm sure you're going to get more into this in your slides, but what has most surprised you about venture capital this year?

I think there is really a haves and have-nots in the industry right now. I think that's true. I think that's true of companies. I think you, depending on who you talk to, it's either been an easy time to fundraise, both managers as well as individual businesses, or a really hard time to fundraise. And it seems like there's a coalescing of dollars or a concentration of dollars behind winners, quote unquote. I think most recently, an example of that in the last 24 hours, saw Andrel getting a big financing at a $12.5 billion valuation. We're fortunate enough to be investors in Ramp. They seem to have more people throwing money at them than they know what to do with. I think Rippling has fallen a similar bucket, which is a bunch of other names. And then you hear a lot of companies are struggling to fundraise. And so I think that that's been a little bit surprising, is that there's really two classes in the industry of people that are having a really easy time and people that are having a really hard time. Great.

And then tell us about your favorite current SaaS tool or platform that you're loving right now.

Oh gosh, current at a usage level, I guess I, and I plugged it a second ago, but I'm a big fan of Ramp. Once upon a time I was at my prior venture firm and I was floating tens of thousands of dollars in expenses just because I never got around to doing them. And it not only made me unpopular with the CFO within the organization, it made me unpopular with my wife because I— a way too high proportion of my net worth was sitting in expenses that needed to be reimbursed. And so Ramp has allowed me a much more seamless process of managing expenses in real time and putting all of it on a corporate card that gets auto-reconciled and approved at a moment's notice. So that's been really beneficial for one, for me, at an investment level, but then also at a home marital level because my expenses are getting done much more real time.

Your wife's favorite tool.

Yes. Yes. She did not love me floating, you know, that balance to my company.

Well, yeah, most people wouldn't. Logan, awesome. Well, we've got people from New Jersey, Cape Cod, Toronto, Chicago, Brooklyn, India, Tampa Bay, Danville, California. I'm your neighbor, Walnut Creek, LA, New York, Seattle. Tons. Hawaii. So it's great. We got people from all over. So excited. Thanks for joining us. We'll pass it over to you to let you take on the content.

Great. Let me see. Let me see if I can do this correctly here. Is that showing up? Can you see it? Is it in, is it in the appropriate mode? Are you guys seeing my—

It's in presenter view.

So it's a presenter view. Okay. So let me figure out how to get it out of presenter view. Hang with me for one second. And if I can't do it in that view, then you guys are going to get me winging it without notes here. So give me 1 second to figure out how to get out of this. This is some user error on my part. Okay. How about this here?

I can pull it up for you.

There you go. Does that work? Is that better? I do it right. Or is it still—

Yeah, looks good.

Yes. Okay, we're good to go.

Rock and roll.

Great. All right, so let me set the stage for this. So every year we do a state of the market report with our limited partners. So for people that know venture capital, we raise, we raise money from institutions for the most part, everything from pension plans to endowments to on down the line of different big entities. That give us sums of money, and we do an annual check-in with them where we sort of go over the entire portfolio, talk about what's working, what's not, what's happened in the last year. When I first joined Redpoint, which is now 4.5 years ago, I got tricked into thinking that it was a big honor that I got to do the state of the market. And my partners all said, well, we just think you would be the best person to do it and the best articulation of what's going on and all of that. Little did I know, this was a way of tricking me into doing a large amount of work that they didn't want to do. So I, I'm not sure it's actually an honor that I get to do this every year, but I've taken it on now for the last 4 years. And so this is the 4th year of me doing a market update. What I try to do every year, we've lived in a very interesting time, at least since I've joined Redpoint. When we first did it, we were in the mania of, we had 2 years of the mania throughout COVID. Of markets just going absolutely crazy. And so I had a lot of fodder to talk to people about, and that was throughout 2020 and 2021. Going into 2022, we started to see the market pull back. It was in the early days. We typically do this in March. And so you were starting to see some signs of, of weakening that were, that were going on then. By the time 2023 hit, we were in a full-on pullback. And so that was a lot of stuff to talk about of what was going on in the market and the reset of valuations and all of that stuff. Now, 2024, as I alluded to at the top, we're sort of in this tale of two, two markets that are going on. And so we can go into the details of it. I'm happy to answer different questions about all this stuff, but this was the most recent report, I guess, we presented in the middle of March of this year. I think it still stands the test of time. I have some updated numbers, but I think the, the broad takeaways from this are still true. So just a level set. That's kind of what you're going to see here. So first, I think everyone knows this, but the, the Nasdaq is currently at an all-time high. This was as of February. We're at 16,100. People probably know now we're even higher. We're actually at 17,700 as of today. So the Nasdaq is absolutely ripping. Now, the reason for that, if you unpack it a little bit more, the market run-up hasn't hasn't been evenly distributed. There's something that people have started to refer to as the Magnificent Seven that comprises Microsoft, Amazon, Apple, Facebook, Google, Tesla, and Nvidia. The Magnificent Seven have been driving the lion's share of the growth in the S&P and the NASDAQ. The top 7 names in the S&P currently represent the highest point in modern history as a composition of the overall S&P drivers. And so if you look, the indexed return of those names, the Magnificent Seven I listed, were up 71% over the course of 2023. And if people had followed, things like NVIDIA have certainly ripped even higher. That's 71% over the course of 2023 compares to only 19% versus the rest of the market. So the principal drivers that we've seen have been mostly concentrated in these big names. Now, now what does that mean for anyone that follows the B2B markets, which I assume most of the people here do? I focus on Series B and C software investing, so I pay even more attention to the multiples of cloud software names. This is a basket of high growth as defined by 30% plus in the public markets. Obviously that wouldn't be representative of high growth in the private markets, but these businesses growing at scale, you can see here what the NTM revenue multiples have been since February of 2019. We've leveled out. It was 10.8 as of February of '24. I think it's roughly the same, maybe ticked a little bit lower since then. Obviously that compares to a high that we saw in the manic zero interest rate environment of 25.1 times in August or October of 2021. And then we saw a trough hit in December of 2022. You can see for the most part, we've really leveled out in this 8 to 10 times forward revenue multiple range, which is largely consistent with where things traded from 2008 to 2018. This is mostly where things have bounced around, but nowhere near the levels that we saw in the peak of the zero interest rate environment. Now, what does that mean for individual businesses? I think people look at the Rule of 40 and oftentimes the R-squared. So the correlation associated between, between growth and the valuation multiples. And what this chart shows here, and I won't get into the specific math around it, but basically it's a two-factor double linear regression. Essentially what that means is how much a percentage point of growth impacts your valuation versus a percentage point in profitability or free cash flow and what the ratio between those two are. And so if you look, the trough, the lowest point of where profitability was, was valued most highly compared to growth. That happened in June of 2020. So kind of the peak of disillusionment around COVID. So what this says, a 2.2, what that means is a percentage in growth, uh, increase was worth 2.2 times that of a percentage increase in free cash flow. Now, as we went through the zero interest rate environment, we saw that get all the way up near 12 times. And so a percentage increase in growth was worth 12 times that of a percentage increase in free cash flow. Now, as you look over the course of the last 2 years, it's roughly leveled out between 2.5 and 3 times, which means we've reached this steady point of equilibrium. Growth is still worth more than profitability as you look at the composition of something like the Rule of 40, but it's much more leveled out and we've reached some, some form of consistency in the public markets of how we value businesses. Now, what does that mean? Well, that, that means it's led to companies shifting how they think about the composition of revenue growth and free cash flow. As I'm sure most people here know, in software businesses, for the most part, it requires heads to grow businesses in the form of sales reps or customer support or whatever the case may be. It also, not having those people in place either through layoffs or hiring freezes, also leads to profitability. It's one of the beautiful things about the software business model is that you, you do have these levers that you can control and think about the balancing between the two. And so we've seen a leveling off and pullback in growth as the market has moved to value free cash flow in a more meaningful level. And actually for the first time at the beginning of this year, companies were, were were more profitable than they were growing on a percentage basis when you compare revenue growth to free cash flow margin. And that's held true here over the course of the last couple months. So there are signs that we are actually bottoming out. And I think this is, this is encouraging at a macro level. I think if people have paid attention to the public markets, certainly Q1 was not pretty in terms of, in terms of expectations and, and businesses missing their, their numbers in some cases. But I think the most encouraging data that we saw in Q through Q3, and now I guess we could pull together the Q4 data, is that what this chart represents, this chart shows the net new ARR added per quarter and the increase year over year or decrease as the case may be. And we saw in Q3 of 2023 for the first time, we saw this actually move higher, uh, in that you, the businesses in this basket of software companies were actually growing, uh, uh, or were, had an increase in net new ARR when compared to the, the quarter one year before. And so I think that showed, uh, some level of optimism that we were bottoming out and that software selling was getting incrementally easier than at least it was over the course of 2022. The other data that we pulled to show this point was this is rep attainment. We have a portfolio company called Bravado that is essentially LinkedIn for sales reps, and they have a community in which they can survey different sales professionals and how they're doing and hitting their numbers. You could see kind of in the peak of the zero interest rate environment, 53% of reps were reaching their numbers. As self-reported by Bravado. In Q4 2022, we saw that number decrease to 23%. So less than 1 in 4 reps were making their numbers. That ticked slightly higher in Q4 of 2023. But most encouragingly, year to date, we have seen that tick up to 41%. So we're seeing more reps making their numbers, which, yes, maybe it's some function of lower quota on the street. And people kind of resetting some of the expectations. But I think the sentiment we're seeing in the private market is, is more excitement and encouragement about the ability to sell software in the private markets for a lot of the reps and the companies that we work with. So what does that mean for the overall state of the private markets? Well, we're seeing a tale of three different situations go on in, in the private companies that we work with. Some have held off on raising subsequent financing. And they're hoping to grow through their valuations. And even though maybe they raised at elevated valuations in 2021, they've been able to execute. And while the multiple may be as compressed, the absolute valuation was such that they could grow through it. The second one, we're definitely seeing a lot of companies raise down rounds. I think what was once a little taboo has definitely become more mainstream with companies able to set expectations with employees around that. The changes that have occurred in the market and therefore their need to, their need to reset expectations on what the business is actually worth. And then unfortunately, the third situation here is we're seeing businesses either shutting down or selling for well below the prior round valuation. Here's some of the data that shows businesses trying to grow through their prior valuations. So what this shows, we track a basket of Series B and C companies. That are, that are done by firms that we respect and we consider peers or competitors to, to us. And so what we went and looked at is the basket of, of businesses in that cohort and how long it had been since they had raised a prior round of funding. So if you raised a round in year-to-date 2024, when was the last round that you raised? And as you can see, basically since the back half of 2021, this is just ticked higher and higher. So in the second half of 2021, it was less than a year between subsequent financings for companies that raised in 2021, meaning if you raised in March, you were then raising in December in this basket of companies. Over the course of the last couple years, we've seen that number trend higher and higher as businesses are trying to grow through the prior round valuations. It keeps going up. We're, we're approaching 2 years between financings. And my guess is this might level off around there. This might even increase higher. But we're seeing companies hoping that even though their multiples have compressed, they're going to be able to grow into a number that's higher than the prior round that they raised. Now, the other component that we're seeing is we are seeing an uptick in down rounds. If you go back and look, we're still nowhere near the highs that we saw after the internet bubble or the Great Financial Crisis. In 2002, 53% of all rounds done were down rounds. In 2009, after the global financial crisis, that number spiked up to 35%. Uh, while we have seen the number of down rounds raised go up, and it actually doubled over the course of 2023, uh, up from 7% to 14% of overall rounds, it still is very low on a historical basis. You can look, it's still the same as it was in 2016, 17. So our expectations is over the course of 2024 and 2025, as companies realize they're not just going to be able to wait from that prior slide and get to an up round, we're going to see more and more of these businesses go out and need to reckon with a down round. And ultimately, while painful, I think that's helpful, uh, healthy for the overall ecosystem. And so this is definitely the second scenario that we're seeing. Seeing in earnest play out in the private markets. Then the third one, unfortunately, is we're seeing a lot of businesses shut down. And this is the number of companies that raised over $10 million in capital that were forced to shut down in each of these years. And you saw 2021 and 2019, it was significantly lower than what we saw in 2022. And then 2023, we saw that number trend even higher. And now in 2024, the run rate of this is, is even higher than 2023. And so these are unfortunate situations where companies just, just aren't able to find a buyer, aren't able to raise subsequent financing, and so are forced to shut down. And I think unfortunately, we're going to see this number continue to pick up over the course of 2024 and into 2025. So this, this is a slide that, that I've presented in the past to our limited partners. But basically what it shows is how many quarters after the peak it took for the venture market to bottom out. And so if you look, the internet bubble, it took roughly 10 quarters, 2.5 years for us to go from the peak of funding to the trough before we slowly started to build back up. Global financial crisis, it was actually 9 quarters. So roughly the same as of, as of December '23, we were 2 years into the peak. The peak was, I believe, Q4 of 2021. So roughly 8 quarters in and we, we still saw it trending slightly lower. If history repeats, we should be nearing the bottom from a venture financing standpoint. And I think anecdotally we're seeing that prove to be the case, that there's more dollars going out now now in Q1 and Q2 of '24 than certainly there were in, over the course of 2023. I'll tell you anecdotally, our growth fund at Redpoint, we did one investment in 2022, which was in January. So I think that we probably mentally lumped that into 2021. Then we did two investments in the totality of 2023, and we've actually already done three investments year to date in 2024. So 2022 and 2023 are as much as the first half of 2024 for us. And so we're definitely picking up our pace as you see better supply of companies coming to market. The companies that kind of burrowed down and said, hey, I don't want to reckon with my valuation right now. I just, I just want to keep building and see what happens. We're seeing those businesses start coming back to market and saying, hey, we'll raise a flat round, maybe we'll raise a slightly up round, maybe we'll raise a down round, but we're seeing a lot more businesses and the supply really unlock and those companies come back to market. The other thing that we're seeing, and part of the reason that I think we've seen this big outflow over the course of the last 2, 2.5 years, is the tourists, quote unquote, in the venture industry. Those tend to come in very hot during the up markets, and then they fade out very, very quickly as the market pulls back. And so what you're looking at here is PitchBook and MVCA data. Of what we called non-traditional venture investors. So that includes corporate venture capital funds, hedge funds, PE firms, and sovereign wealth funds. And if you look, those tourists, quote unquote, they participated very meaningfully in the run-up in the market. So you see here on the right-hand slide, the dollars they invested grew at a 31% CAGR, which is kind of astounding from 2020, sorry, 2011 to 2021, and we've seen a 35% CAGR decrease from 2021 to 2023. Similarly, the venture market, while the more traditional venture firms have been a little more, were definitely more patient in their scaling compared to some of these non-traditional investors. And so the dollars into the industry only increased at a 9% CAGR over the course of those same 10 years. And we've seen the outflow at a, at a 10% CAGR since 2021. And so the venture dollars, the venture investors that you pick to work with tend to be more committed to the asset class through different cycles. And so we've seen that in spades over the course of the first 10 years of this bull market, and then the last 2 years of the pullback as well. And just a note on the quantum, I mean, you can see traditional venture investors represented even at the peak, only $62 billion. Of dollars into the asset class versus non-traditional investors was $286 billion. So a very significant bubble created by both parties. No one's immune from any blame in the run-up in the zero interest rate environment, but the quantum of dollars were much more when you factor in sovereign wealth, PE, hedge funds, among others. So one of the other things that we track is we track a number of upstream firms that we consider feeders to us. And so as we focus Series B and C, we have a list of, I think it's about 50 different names that we track as, hey, we want to monitor what's going on in their portfolio. Interestingly enough, we've seen that the number of deals that those firms have been doing has actually stayed relatively muted over the course of of the last 2 years or so. It bottomed out in around Q1 and Q3 of 2023, but it stayed roughly flat. And the pacing of, of net new Series A deals that those firms have been doing have been really relatively consistent, but at a much more muted level than what we saw over the course of 2021, especially. Now, the firms that we compete with at the Series B and C levels, we, we are seeing a significant uptick. And this is even true for us as well. The bottom of the market seemed to be Q3 2023 from a data standpoint. And these are our peer firms, competitors that when we miss a deal that they do, it's a very bad day internally. So we have a list of, I think, 15 to 20 firms that we, that we track as competitors. And you can see the run rate pacing for Q1 of this past year, which I will tell you has proven true in terms of the actual data, is the highest that it's been actually since Q4 of 2021. Now we can talk about a number of the different factors at play. Some I think are are great factors and some I think are maybe myopic financial incentive-related factors, people with big funds just deploying dollars. But we have seen this pick up over the course of 2024. Now that's not to say the multiples in totality have picked up. So what we did here is based on those Series B and Series C deals that we track internally, either done by us or done by by firms that we have a lot of respect for. We track the ARR multiple that those deals get done at. Now, this is a, this is an, I believe it's an LTM ARR multiple. Yes, that's right. It's an LTM. So whatever your ARR is at the time of the investment to do an apples-to-apples comparison-ish, it's still not perfect, but we compare that to an LTM revenue multiple. In the public markets. This basically is showing the spread between public markets and private markets and the delta in valuation. Now, there should always be something of a spread that exists here, particularly when comparing LTM revenue and current ARR, because private companies at smaller numbers should be growing significantly faster, 200%, 300%, 400% versus, I think the fastest growing company in the public markets right now is, I believe it's Klaviyo growing at something like 45%. So you'd expect this, this number in the private markets to be higher. I think what's interesting here from my vantage point is one, we're seeing the spread tighten over the course of 2024, and we've seen it go down from the peak that actually was 2022. The weirdest time in venture from my vantage point over the last couple years wasn't 2020 or 2021. 2021, all markets kind of went crazy over that period of time. And while the spread was, was certainly high in 2021, it was actually even higher in 2022. And I think intuitively people probably know the reason for that, but the public markets get priced every single day. And so an adjustment can happen over the course of a week or two weeks or a month, and you can see multiples really fall off versus the private markets are very much a lagging indicator. And so I'll tell you the craziest point in time I think in my venture career was the first half of 2022 when you saw public markets trading at 8, 10, 12, 14 times revenue, and you still saw private companies getting done at 100, 200 times ARR. And that was just a very weird dislocation that happened and indicative of the delta in timing and repricing that occurs between the public and private markets. And So we're getting closer to this spread. We're still not at the levels of 1.5 to 2 times that I think we saw historically as the spread between what a public company trades at and a high-growth private company trades at. But we're definitely getting closer. I'd also note this is a basket of the most premium names in the private markets. We keep a list similar to the point I made earlier of ones that that we really respect the firm that ended up doing it. We view it as a high-quality business that we would've wanted to evaluate, really the beachfront property of the private markets. And so this definitely isn't a subset in totality. These are just the high-profile, high-growth names and the different spread that exists between them. That said, you'll see one of the other points is there really are a have and have-nots between AI businesses and non-AI businesses. We're seeing almost a 3x premium in the private markets. I think it's come down a little bit in the last couple months, but at the time of, of us pulling this material together, which was the 6 months in the back half of 2023, and I think the first 2 months of 2024, we saw a 3x premium between what an AI business was getting valued at versus a non-AI business. We tried to be We, we tried to be objective to the extent we could of companies that actually had artificial intelligence versus just the marketing associated with it. But interesting to see that it was a 3x premium that existed for companies that were associated with AI versus those that weren't. Now, you might ask why that's the case. Well, those companies were raising more capital as well, and some of this has to do with some of the computational needs associated with building true AI businesses. But then also these businesses were just growing much faster. And so this was the, this was the, what was it? I think it's the projected ARR growth of the companies. And we were seeing the AI businesses projecting growth of 400 to 500% as a median revenue growth versus the, the non-AI companies were growing at 200% or so, still significant growth rate. But you could make a case that if these businesses are able to hit those numbers, they warrant a premium multiple given how fast they're expected to grow. And we've seen that in some of our portfolio companies associated with AI or the ones that have derivative effects from AI. They're growing at an extremely fast clip now. Now you really need to unpack how much of that is just exploratory budgets, how much of that is true recurring revenue, how sticky those things are. But they're definitely growing at a much faster clip, at least nominally and expected. And so you could argue that it warrants the premium in valuations. There's clearly more AI on the come. I'm sure a number of the people listening in here are, have AI in their business. What we did is we threw together a word cloud of the different terms in the YC 2023 batch. And you'll see here some of the bigger words that were associated with these businesses. You can see AI, you can see artificial intelligence, you can see generative AI, you can see machine learning, you can see a number of AI-related terms in here, which again, it's not a perfect data point for all the AI businesses on the come, but we are seeing YC fund a number of AI-related businesses. And so I, I think we're going to see a lot more on the come over the course of the next couple years as these businesses mature and reach a Series A, Series B, Series C stage. One of the things that we try to be cognizant of is that market cycles ultimately will repeat themselves. If you go back to the internet bubble, there were a number of companies that created a significant amount of equity value during that period of time, But that doesn't mean that they were all great returns along the way. If you got into Amazon or if you got into Yahoo or you got into eBay or PayPal, you did quite well. If you got into Webvan or Pets.com, you didn't. And so just because a trend is inevitable doesn't mean a company is. And one of the things that we're very cognizant of is sometimes the big value creators actually come after the euphoria that comes with these markets. And so, I mean, I think Facebook and Google are great examples in the internet age of businesses that came after the real run-up in the market of '98, '99, 2000. Facebook was certainly founded after that time. Google really found their sea legs way after the manic bull market that was the internet bubble. I think similarly, if you look at mobile and look at when WhatsApp Snapchat got founded, or when Instagram got founded, or when Uber got founded, or a number of these companies that created a ton of equity value, they, they came after the, probably the peak of the mobile run-up that was started by the iPhone phone. And so this is something that we always try to be cognizant of internally. So in summary, I guess for everyone's kind of takeaway on all the things I just said, the markets do seem to have stabilized a little bit, at least with regard to software selling. And we're increasingly optimistic about companies' abilities to hit their numbers over the course of 2024. There are a bunch of businesses in the private markets that have yet to take medicine and reset valuations. And so I think we're going to see a lot more of that coming, either with down rounds or shutdowns. And so unfortunately, I think that's still on the come and we're going to see that number keep trending spending higher over the course of this year and next. And so while private valuations have reset lower over the course of the last couple years, there's still a pretty wide spread that exists between public and private markets today. And so we expect that those numbers will continue to coalesce in one direction and hopefully get a little tighter to that spread we had seen historically of 1.5 to 2 times premium. And then as I referenced at the top, we are seeing this bifurcation in the private markets where there, there's really a haves and have-nots. And a lot of the haves currently are in the AI world. I think maybe since we originally did this presentation, that's lightened up a little bit. And, and maybe there's not quite the same manic enthusiasm for all things AI as there was in 2020, the back half of 2023 and the beginning of 2024. But there's still definitely definitely haves and have-nots with those AI companies projecting at least to grow faster, needing more capital and commanding higher valuations. So with that, that is the totality of the slides I have. I will go out of presentation mode and I guess, Caitlin, turn it over for any questions that people have.

Hey, Logan, it's Jason M. Lemkin. Can I steal a question or two ahead of the, our esteemed guests?

Jason, you can do whatever you want. This is your world. Thank you. I'm going to begin.

This was A+. This was just what I'd hoped. So it was great. I loved the presentation when I read it and I tried to summarize it, but this was much better. Two things. One is, I'm sort of a, by my vibe as a founder, ex-founder, I'm sort of cautiously optimistic. I'm looking for the good stuff in SaaS. It's recurring revenue after all, right? You're supposed to be able to screw up, but even with triple-digit NRR, it's supposed to be a good thing, right? I'll tell you what I want to believe that we're bouncing off a bottom like the Bravado data and the others, but I'll tell you what I'm discouraged about, and I'd just love to get your thoughts. Salesforce and Asana both said single-digit growth next year, single-digit. And Mongo, which is epic, I mean, we can talk about other competitors, but everyone runs their workflows on Mongo. They said teens from forties. Mark Benioff himself was pretty glum when I read the analyst call. I didn't watch it, but I read it. He's like, "It's just going to get harder next year, and we actually need 50% more coverage for pipeline. We need 3x coverage of pipeline to hit our number now, not 2x." So how do you think about what Salesforce and Asana and Mongo have said versus VCs wanting to be bullish and see the bounce off? I think we should be doing better. I mean, you can't cut forever. You can't cut seats and manage workflow. Eventually, you have to invest in growth, But I'm a little discouraged about what Salesforce and Asana and Mongoose said for next year. For this year, for next year.

I, you know, in, in, in the, the, uh, Asana certainly. But if, if you put, uh, the two bellwether companies, uh, of one is seat-based, uh, user, uh, workflow application, uh, Salesforce on one side, and then you put maybe Mongoose and Snowflake on the other, which is consumption-based infrastructure, right? Both of them are having problems. And so there's clearly some macro through line that exists. And so that data to me was particularly discouraging. And if you go down the list of names, I mean, I think only, I think maybe 10% of names really beat in software this past quarter. I can think of Adobe certainly did, Braze did. There's a handful of them, but there aren't that many names that beat there. And so I I think I, I do think seat-based pricing is really facing, uh, some headwinds, and there's just a real reconciliation going on of like how many licenses are actually needed. And so I would imagine that that's going to continue to face meaningful pressure. And I've seen it in some of my companies that they're hitting their net new numbers, but they're getting crushed on their NRR numbers because no one wants to expand, and they're willing to share licenses and all that stuff. And I'll tell you, I think Q1, even though I presented all this optimistic data, Q1 might have been, at least for the, the medium-sized companies in our portfolio, the hardest quarter of selling since 2021. And I don't know exactly how to reconcile that. There wasn't any specific thing that I could say, okay, well, security businesses didn't didn't hit their numbers, but data infrastructure businesses did, or application businesses didn't, but you know, whatever, uh, consumption model companies did. And so I've really struggled to tease out what the haves and the have-nots are in the private markets. The only things that I've seen consistently growing right now, it seems to be cybersecurity and some things related to AI. And like, I think if you look at all our, all our investments that we've made in the last couple quarters, they've been one of those two things because it feels like those are the only bellwethers that are continuing to go in some way in the market. If you're a horizontal workflow tool right now, it just seems really, really hard going to justify those increased seats, justify the pricing. And so I think we're really going to have We'll know a lot more of this next quarter, but you're right. I was very disillusioned with the Mongo and Salesforce data, particularly how well those companies are run.

I just thought the promise for— Salesforce no longer publishes NRR, which I think is probably pretty telling, right?

Yes. That it's bad.

Because with 115%, 120% NRR at Salesforce, you should never have single-digit growth, right?

Yes.

This is just what bugs me now.

The way that math works is it should be something close to that. At least in the teens. At least in the teens.

The only thing I would add, and then I want to get one other question, but I don't want other people to have time. Obviously, security overall remains on fire. AI remains, it's making all of us make a few nickels, even just in the public markets, we're making money off AI. The one thing that I've seen, I call it B2B2C, and maybe that's silly, but when I look at my own little portfolio, Owner with Redpoint, RevenueCat, which is mobile subscriptions for consumers, Gorgeous, which is a lot like Klaviyo. And why is Klaviyo doing reasonably well? They're just selling to regular consumers, which in a 3% unemployment world, pretty decent economy. I view that as a parallel universe from B2B to B, wherein in the Salesforce, Mongo world, we're cutting everything we can. But if you're directly tied to the US economy and you have a disruptive product, you should do well, I think, today.

[Speaker:JASON M. LEMKIN] Yeah. I think there's also something about the end price point as well. I referenced Scribe at the top, and they're doing exceedingly well with an ASP of, you know, thousands, low thousands of dollars. Right. And I think Gorgeous, I don't know, RevenueCat's number, they're cheap. Yeah. And so it's almost like if you can sneak the budget by and it can be a rounding error on your expense reports to some extent, or it's like mission critical, like Klaviyo or Gorgeous at a low price point to a business that you just need it to run. It feels like those are the ones that have continued to fly, to keep the flywheel going. I did, I looked at one point the, the businesses that have been the most capital efficient, like bootstrapped their way to large outcomes. And for the most part, they all started at a price point of like high hundreds to low thousands. And I think it's because you can expense it. Scribes that way, very efficient. Calendly, uh, Atlassian started that way. Um, you know, you sort of go to Mailchimp, you go down the list and I'm sure Gorgeous benefits from that. And there's some like counter cyclicality that can exist. Exist when people can just put it on their expense reports or Zapier. People can put it, people can just justify it for the mission criticality of the business. And so maybe that's a through line in all of this. But you're right, like the procurement departments are earning their keep right now in enterprise sales.

Brutal.

It's just, I would not want to be selling a $500K Workday seat to, you know, to some big conglomerate somewhere because you're going to get raked over the All right.

One last question that I do want to let others have time, but since this is your LP report, one thing that I'm embarrassed to say I did not actually realize until yesterday is how inverted the premiums of Nasdaq and SaaS and cloud have become. So I looked at the BVP Cloud Index, and I should have realized this, but there was obviously a 40 to 50% premium for cloud stocks to Nasdaq through 2022. Now there's like a 40 to 50% discount. Like cloud stocks are trading at a 30, depending on what basket you use, a 30 to 50% discount to NASDAQ. So for founders and others, what does that mean? Like, there's always the ultimate question for limited partners. You just did a limited partner presentation. They give VCs money. You got to do a lot better than NASDAQ because otherwise I could put my money into NASDAQ. I can make 10% or depending on what measurement date you use, Risk, it's highly liquid. So does this matter that we're trading at a discount to Nasdaq? Is it irrelevant because we're looking for outliers, or is this a problem for SaaS and cloud if we're at a discount to Nasdaq?

[Speaker:JASON M. LEMKIN] It's a problem for sure. I do think the correction in the software side is probably overdone. I also think probably the enthusiasm of some of these, that Magnificent Seven, is probably overdone the other way. So I'd expect some normalization. To occur between the two. But at the end of the day, you get value based on, I mean, a bunch of things, gross margin, free cash flow, all that stuff. But like people want to show consistent growth and that you do what you say you're going to do and you have the controls and levers of your businesses. And a lot of software companies haven't shown the ability to forecast and the ability to consistently hit their numbers. And I think the public markets are reflecting that. On the private side, you know, I alluded to this a little bit, But I came up with a couple points of why the market's back to being active. And I think one is that the quality of the names that burrowed down and just hung out for 2 years are starting to come back. And I think that's good. Two, I think that there is enthusiasm and excitement for a lot of the net new AI names that are coming out to market. And so I think that's good. 3, I think we've seen some stabilization of at least what things are worth in the public markets. And we showed that slide. And so it was hard to underwrite anything when you didn't know if a company should trade at 20 times in the public markets or 2 times in the public markets, right? And so we've stabilized. So at least people are maybe able to underwrite it. The last ones are a little bit more cynical. If you have these firms that have raised billions and billions of dollars and they're not going to give that money back, right? And so it's sort of like, hey, you know, get busy living or get busy dying, like the old Shawshank thing. I feel like those firms are now like, hey, we, we might as well invest. And now that the market's a little bit more stable, we're just going to put money out. And we've definitely seen that from firms that have raised 3, 4, 5, 6, 7, $8 billion. And they're like, might as well start doing it now because we don't want to have an 8-year fund and we don't want to give our LPs money back. And so I think that's leading to some perverse incentives, which is causing some more of this distortion between public and private markets. The funny thing about venture that you know all too well is it's really hard to get going and it's really hard to die, or it takes a long time to die. It's like the— I jokingly call it the 5-point exploding heart technique in Kill Bill or whatever it is, where like a firm could be dead, but it's not until they start walking that their heart explodes. And I think you're seeing a lot of firms that still have big amounts of capital and their LPs might be very unhappy with them, them, but they have the money and they're going to keep going, and it's going to take 5, 10, 15 years before the music ultimately stops for them. And so I think we're seeing some perverse incentives there as well.

Yeah, I think I've noticed of the— I don't have the portfolio to pull on that you do, but of the 3 rounds, significant rounds that have happened in my portfolio, what is interesting this year is they've all been insider-led by good funds that have a lot money. So I think this is my lay version of, look, we did one deal in 2020. We've got the billions and maybe it's expensive, right? Or whatever, but at least the valuation is more reasonable than 2021. I've got to deploy the capital.

Yes.

Because all these companies would've been Tiger deals in 2021. Now they're all led by top-tier funds. All of them led by top-tier funds.

And by the way, it takes the same amount of work to support a company that you put $20 in as it does $75. And so, you know, putting more dollars into the same companies, I think, allows you to scale a little bit more, uh, your headcount, uh, which again is a cynical take on how big the asset class has gotten and some of the incentives that exist for people.

But all right, sorry, monopolize. Caitlin, we got some other good ones.

Caitlin, you're on mute. Oh, there you go.

I said we do. Thank you, Jason. I'm going to pull, um, Taren onto the stage. Page. A lot of these reference specific slides, so I don't know, we might have to pull it back up, or you might just be able to talk about it.

Okay, I think I closed out. I'll try to go pull them back up.

No worries, I've got it here too if needed. Hi, Taran, welcome.

Hi, thanks.

Do you want to ask your question?

Yeah, sure. Hey, Logan, hi, thanks. As usual, I think great set of slides, very informative. On your slide on the 3 situations that are playing out, you laid down one where the valuations are growing, the second one being where companies are raising down rounds. My question is, are you seeing companies right in the middle where you're not growing as high as you should be, you at the same time, you don't need a lot of capital, you don't need capital at all, you are kind of generating enough cash to kind of become self-sustaining. So you're really in the middle, right? So what kind— are you seeing more of such companies and what would you advise for such companies? Yeah, we definitely are. And I think that's a great position to find yourself in. Ultimately, I think I ultimately discourage a lot of companies from raising venture capital because it does set you on a treadmill of needing— it changes the culture of the business, it changes the expectations of outcome. Income. It changes the dilution dynamics. And I find that the best way to make money is own as much of your company as possible and sell it for a reasonable valuation. And so we are seeing more and more of that. The end state of how that plays out, if you have raised venture capital, at some point your investors are going to need some liquidity in some dynamic where maybe you buy the stock back from them. Maybe you build enough cash on your balance to be able to buy them out in some way. So it is sort of a one-way door raising venture capital, but we're seeing a lot more of that. And I think not being beholden to the venture markets is just a great thing for founders. And again, it always sounds like it's a little weird for me to say that. I think that the number of businesses that have been venture funded versus the number of businesses that should be venture outcomes, it becomes very— there's a big discontinuity that exists when markets run up because you're a founder and I'm saying, hey, well, why don't I give you this money? It's very cheap dilution and all that. And it's normal to say, yeah, of course, that sounds great. Like, of course, everyone's licking me up and down saying I'm the best thing ever. I'm going to be a public company. The real answer to that is that's our job, is to sell capital to founders. And so I think finding yourself off that treadmill or finding a way off where you control your own destiny, I think is a great thing. And so there's definitely situations like that that are presenting themselves more and more, and it allows you to kind of control the outcome that is a success for you way more than needing a billion-dollar outcome. Great. Thanks.

Thank you, Taryn. All right. Next question. We have Frank, let me see here. Frank left, but he had a good question, um, around your data on shutdowns and businesses. Are the shutdowns mostly attributed to poor execution or undifferentiated offerings, or what have you kind of tapped into there in terms of the data you found?

Yes, uh, is the answer. Uh, I, I would say, I would say always. I mean, I, I hate to, uh, ascribe too much to, to poor execution. I mean, there's founders out there that are, that are trying their, their hardest and I think more often than not, if they got funded in some way, there probably was some belief that the market could manifest itself. And usually it's a function of this, the market not being there. Now, there's certainly notable examples of people raising way too much money and mis-executing over the course of their journey. What I've seen most is there's some early signals of product product-market fit that gets extrapolated to an end state that actually isn't true. And so that seems to be the majority of the times that, that, that these businesses just aren't able to figure it out and are forced to shut down is some result of product-market fit existing. Otherwise, you could probably sell the company in some way, shape, or form to get some amount of capital back, or at least some nominal win. So usually it's something related to product market fit, which I guess is a derivative of execution. But yeah, I hate to ascribe too much to the individual founders themselves. It's probably more the end market.

Yeah, for sure. All right, I'm going to ask, invite Kyle up to ask his question.

Thanks, Logan.

Hey, Logan, great stuff. Appreciate it. So I'm CEO of an AI company, but we're not generative. Generative AI. We are a combination of graphite, AI, and everything else. That's just an adjective. You can add it. Nothing stopping you to be generative AI. I think now you are. I just said it.

Okay.

We've been kind of doing the same thing, but I've seen a little bit of headwinds is I'd walk in, everyone really excited and like, oh, you're not generative AI. And you're like, it's hardcore AI, product market fit, law enforcement market, lawyers, legal tech for it. I'm just curious what your opinion is on generative versus other types of AIs right now.

Funding?

Yeah, I think that the businesses that are truly AI in some way, shape, or form, we, they've been around for a while and we just call them something different. Like, what is Google? Their search is certainly very AI to me. And so I think that distinction feels a little arbitrary to me. And the number of businesses that are calling themselves generative AI AI, but have some derivative use case that we could have called machine learning 5 years ago. I think most of these things are just marketing-level considerations around it. Like, what is distillation and the ability to summarize large amounts of work? I guess that's generative AI because it's generating something back to you. But I think we've reached a new paradigm in all things AI in some way, shape, or form. And so I don't find that to be a big distinction. One of the questions we, we ask ourselves, 3 different questions, which with any investment we make, which my father-in-law very kindly incorporated into his wedding speech for me because I told him this, and then he used it to explain me getting married, which, which was a funny anecdote of being a venture capitalist and talking too much to your father-in-law. But the 3 that we use are why now, why you, and why this. And usually there's never a new idea. Like, I think every idea has been thought of in some way, shape, or form. It's just why now could it exist? And so if I were talking to you about your business and trying to figure out like the opportunity that existed there, I wouldn't be asking myself, is this generative AI or not? I would be asking myself, why will this work today? When it wouldn't have worked 5 years ago? Like, what is that thing that shifted? And maybe that's generative AI, maybe it's the power of new models, maybe it's, you know, something else that's come because of data privacy and I don't know, CCPA and GDPR or whatever. Like usually there's a why now. And I think generative AI is a very simple why now that keeps people from having to ask more ancillary considerations. But as long as you can answer that and my, my book, it, it doesn't really matter if it's truly generative or not. Awesome. Thank you.

Thank you, Kyle. All right. I think we're out of time. Top of the hour. But Logan, that was so much data in 30 seconds or less that I know there's a lot to kind of parse through. What are you most excited about looking at all this data crunching what you did and, and what to look ahead for, for the future rest of 2024?

Yeah, that's a great question. We are, I, I'm very excited about the opportunities that exist exist in different verticals that have maybe been difficult to address because of either ability to get data from these different systems, ability to distill it in a way, ability to, to work through distribution channels that are maybe opaque or difficult. And It feels like AI, not only has the technology sort of shifted some of the things that can be done, but it's also opened the aperture and the desire for historically difficult organizations to sell into, be it the government, be it healthcare, be it law firms, be it whatever example you want to come up with, financial services. Not only is the technology potentially doing a good job of changing doing that. But these institutions, I think, are far more receptive to the different sales cycles that, that can exist and the things that you can push through. And so I think that you're seeing those two things come together now, which hopefully will present an opportunity for large equity value creation in the coming, the coming years for these different types of businesses. So I think that's one thing that we spent a lot of time thinking about. And hopefully, hopefully AI presents a, I think it would be a kick save for a number of these firms that have raised so much money and need to find ways to deploy it. So I'm hopeful that, that AI presents a new paradigm for value creation for the venture capital industry, because we certainly need it.

Fingers crossed. Well, thank you, Logan, so much. Thanks everyone for joining. Do not miss us next week. We have our very own Jason M. Lemkin. He is going to walk us through his thoughts on the current status of fundraising, but also what you should do about it. And of course, open it up to any questions that you have. So don't I guess it— we'll see everybody back here next week.

Thank you guys, have a good one.