VC State of the Market with SaaStr CEO Jason Lemkin and Cowboy Ventures Founder & MP Aileen Lee

Thanks, everybody. Who went to the party last night? Was it fun? Okay, good. So it's day 3, and day 3, we do have some great CEOs and CROs and others, but it's traditionally been money day. We have like hundreds of brain dates with VCs, and so much has changed that I wanted to invite someone that has truly seen it all to help us learn about it.

Helps to be so old.

Helped, seen it all, but really seen it all with Aileen Lee, and For a little bit of context, the world's changed so much, right, in the last—

just this morning, actually.

Today we're going to talk about it. But when I started investing in 2013, I think Aileen reached out to me to meet. I knew nothing. I didn't know what like an emerging fund was, what was going on. And we met and Aileen was truly a pioneer. Cowboy Ventures. Now there's hundreds of seed funds, right? This is 500, 600, Shai Goldman. But probably you, Homebrew, a few others were like The first group that created a real seed fund, right, in 2012 or something like that?

Yeah, I will get— yeah, so we started in 2012. I will give credit to First Round, Josh Kaufman and those folks.

Yeah.

Steve Anderson at Baseline, Harrison Metal, Michael Dearing, Chris Sacco was angel investing. Like, I was at Kleiner because I started at Kleiner at the end of '99, and the seed thing was happening in like the mid-2000s, like '05. That's when we really should have started, by the way. Yeah. And angel investors were getting in at 3 pre, 4 pre, and they were all co-investing. And then as a Series A investor, I was kind of running around. I was already friends with a lot of those folks, and I was just constantly trying to figure out what they were investing in so I could get a chance to look at it for the A. Um, and, uh, and I mean, I, at Kleiner, I never really knew any of our, what we call LPs, which are the investors in our funds. We never had an LP meeting in the 12 years that I was there. So it was actually those guys who I called and said, hey, I'm thinking about starting a seed fund. What do you think? Is it too crowded? Isn't that funny?

Yeah. The answer probably was yes.

They were like, no, it's not like, you know, the fact that you've been an investor is really different. There's also you're a woman. There's no women. That would be different. Come join us. And they introduced me to my first LPs.

Oh, that's good.

Yeah.

Yeah. So real. So we'll talk through what's changed and what's changing. You're a pioneer there, a pioneer in, in sort of institutionalizing that. And then we will dig into the market and then a pioneer really Helping all of us think about how the markets will change. And we're coming up on the 10th anniversary. We were just talking about backstage of, of Aileen's unicorn post on TechCrunch. A lot of you probably never read it, but when I read it, there's a couple of things where my jaw dropped and it was the first time we'd really seen data around startups and what it takes to get to a billion and how many were solo founders and how many, what age they were and all the pieces. And there were two of them that were sort of canonical. So that inspired us. Then I'll tell just a quick story, and then I do want to dig in. When I started investing for real, it was great that we'd met, and it was friggin' crazy in 2013. I felt like, I wrote this, and I got a little trouble, I said I felt like it's Mad Men. I felt like I had walked back in time. I couldn't believe, I mean, 2013, not everything's changed, but it is a long time ago, right? I was literally working on Sand Hill with the, like the, you know, the whatever, the beige-colored furniture, and just room full of not just dudes, but like This, the whole patronizing view of venture capital, I felt like I was literally on Mad Men, right?

Yeah, a lot of when you walked into VC offices, there's an extremely attractive receptionist, and then a bunch of guys in offices, and it really did, it was like Mad Men.

Yeah.

Just different clothes, different cars.

So just, thank, just the whole, when you, even before AllRaise, and I don't wanna spend all our time, it's just such an inspiration to me to see a change agent And I just felt so inspired by it because I couldn't believe it. And I had this one moment, and then I'll stop. And I just, not only was it all dudes, but I went to this one pitch. It must have been early '14, and it wasn't just the partners and the associates. For some reason, there were like venture partners, venture friends, venture buddies. It was like 28 dudes, and the air conditioning broke, and there's this poor woman CEO pitching. And I don't know why she was uncomfortable. She might have been comfortable because it was 98 degrees. She might have been comfortable because Pitching's hard, but watching this, her stand in front of this room with, with 20, and I'm like, this is just the worst industry. This is just, this is terrible.

I would like to give you a giant shout out because the SaaStr community, and like, you demonstrate, like, we know that to make the change, the CEO has to be committed and the leader has to be committed. And I just feel like the commitment you've made at SaaStr to make sure that every panel, every stage, the mix of of the audience is like, is diverse, and you do a huge, so I would like to give you that. It's like, really. It's like, you were one of the first big communities to be like, no mantles. We're just, we're never gonna have a mantle. I mean, I don't, it's kind of crazy that not everyone is like that still, but you really were the first.

I mean, I wanna talk about the industry in general, but I'll, you know, it's, if you want my learning for what it's worth is we did the 2015 annual, And it's like a startup. So I decided we wanted to do one. I had 30 days to get 1,000 people. So what do you do? You call your friends. Not really my friends. Aaron Levy, will you please come? Right? A few other folks. And then I'm like, Slack seems hot. Stewart Butterfield, will you come? And I turn around, and I'm like, oh my god, it's all dudes. I mean, it's the terrible thing that happens with startups, right? It's not always intentional. And all of a sudden after that, first year, I'm like, okay, we have to be, if we're gonna do nothing else, we gotta set this as a goal. We have to have at least 50% women, right? but even I, it's terrible to realize that it should have, I should have been aware of it in 60 seconds, but I wasn't. With one, I'm just, oh my God, how do I get people to come? Like, I don't, I gotta, I gotta get a party together, right?

You've done an amazing job.

But it's the same problem with founders. It gets to be too late, right? If everyone's like you, there's a moment where it's too late. So, and now we've talked about that.

It's never too late. It's never too late.

It's never too late. It is, this is an example. There's a ton of VCs speaking. This will be one of the best sessions, but we've got Benchmark, Lightspeed, Andreessen. After this is State of the Cloud with Bessemer that we know well. We've done that like 5 years here. It's going to be pretty cool with a lot of data. So come to all of these. But anyhow, I wanted to just briefly talk about this slide, which is Figma. I know we can't quite see it, but we had a lot of— we have a lot of content in here about how the markets are down and the markets are challenging.

But it's really cool how they arranged the announcement.

Yeah.

To make sure that it happened during the disaster.

Did everybody see this this morning?

Well done.

Okay. Did anybody raise the price of a discussion you're having with a VC here today as a result? Anyone up the valuation? Anyone feel more confident? A little bit?

100x is back, baby.

Yeah. So, so I know we're processing it, but there's been a lot of negativity in venture the last couple of months, right? Does this— how does it change what you think?

Well, I wouldn't say negativity, but obviously, like, prices have— I mean, obviously the public market is the tail that wags the private market dog. Right. And so— and it's not— it's interest rates. Right. And also like the pandemic, like, you know, we pumped a lot of money into the economy during the pandemic. We bought a lot of software during the pandemic. You saw things like Zoom go crazy and then everyone's like, oh, I'm just like Zoom. I also should be able to grow at that rate and trade at that multiple. Right. And that's just— that's That was like a false assumption, I think. And I think it's kind of crazy now looking back at it that we didn't think, oh, this is a pandemic bubble in some ways. But clearly there was just a lot of stuff that is not going to be like it was a year and a half ago. And so, yeah, I mean, I think every venture investor, if you like, raise your hand if you're a founder or if you're a CEO. OK, raise your hand if you have a board. OK. So we're going to dish a little bit on like what's going on behind the smiles at your board meeting, because a lot of people are sitting on super overvalued investments and depending on what price they paid and what's in their portfolio, they are super stressed out right now because they don't see a path for their portfolio companies or a chunk of their portfolio companies to grow into the last round valuation. And so I think that is— and they're probably pretending that everything's fine.

Yeah.

So when they see you, they like high five you and like, what's up, man? And like, but inside they're like super stressed out. They're not sleeping now.

When now? But, but of course VCs have multiple bets. This is the classic dichotomy. I only get one bet and these my VCs in Jackson Hole or wherever they're in Europe, they get to make 20 or 30 bets. Why? Why are they stressed? If because they've got a Figma in their portfolio, why are they stressed?

I mean, Figma is a— we were talking about this earlier, right? Like, I mean, it is the— it is the thing that you want as a venture investor, right? It's the one thing that's going to drive your entire portfolio and I think there are a lot of really interesting lessons about that story, right? One is like, for the first 4 years of Figma, maybe the first 5, people really laughed at it and looked at the venture investors and this company that had not shipped a product for 2 years. And then they shipped a product and no one was really using it and people said it sucked. And then they basically like shipped another release and everyone said it sucked and laughed at the venture investors and the people working there being like, they're chasing a windmill. This is never going to turn into anything.

Yeah.

And so even though when you look back at it, I think it's probably like an 8-year-old company, 10-year-old company. So getting to $20 billion in that period of time seems pretty fast. But the first 4 or 5 years was pretty slow. And that gives— hopefully, like if you are working hard at something that you have a big vision for and it's not all going your way, you should know that not all $20 billion exits are up into the right the entire time.

Yeah, I think Figma— I knew less about Figma than maybe I should have, but I was looking it up this morning. I think it was 2012 to 2016 until a full GA. Yeah, right.

Okay, so it's a 10-year-old company.

Yeah. And then 2016 to 2022, they went to $20 billion.

Yeah.

So that— and we were talking about Notion. Notion was here, the CEO was here yesterday. I think they were 5 or 6 years until they had any real revenue at Notion, and now Notion dominates, right?

And, um, no, I think that is just obviously I think that's something we'll talk about, which is PLG. Yeah, right. And like, depends on who your customer is and how your product gets adopted. If you don't— if you can have self-serve and you don't have to spend any money on AEs or customer acquisition, then you can spend a lot of time building the product and then it'll fly off the shelves. If you have a product that has to be sold, it's a lot harder to wait for 4 years.

Yeah. So let's just— but this— the Figma thing we didn't talk about before, but it's so interesting when, as an investor, as a seed investor yourself, When is— when's a startup been at it too long? When do you— like, you'll meet with the founder and they'll be like, "Here, I've been doing this for 5 years. I'm finally at a million in revenue." Yeah. When do you lean in and when, when are you like, "Well, it's just— it's a sign that like you're never really gonna get there." How do you— when do you decide? What's like the oldest startup you invested in? Do you know?

Oh my gosh.

Have you done one that took 5 or 6 years to get a seed check? No, no, no.

I would say at Cowboy, our, our specialty is probably more pre-product risk. So most of the time, like more than probably 60% of the investments we've made in the past 10 years are founders who need money to build the product.

Okay. You didn't have any that took 4 years then?

No. Like, no. Like, they're like, we have this idea. We built wireframes, we've done some landing page testing, we've done 20 customer interviews and customer discovery, but we, We come from humble means. I don't have a giant bank account. I need the money to hire the engineers and build the product.

Yes.

And, and so the risk that we take is often like, you know, are they going to be able to build something like they say they are? And is there going to be a there there when we actually ship it?

Got it.

But no, I don't know about you.

Have you—

do you have anything that's 4 or 5 years?

No, but maybe, you know, sometimes you don't— you don't know the history of the company. For example, like You know, so on paper, my best investment is TalkDesk. We were talking about last year, and I thought it's interesting, the history. When you look at the history that I was aware of when I met Tiago in 2014 was it took him a year to go from like 0 to 2, and then another year to go from 2 to 15. Okay, that was what I knew. When he came to SaaS to Europe in Paris, he's like, you didn't know I babysat for 2 years before that. I had no— I was a first-time founder from Lisbon with nothing, and I literally, I came by myself. And back and forth. And I— so sometimes there's a prehistory.

Yeah.

And maybe as founders it's good to market yourself properly with what you're pre— you know, or I had an agency like Mailchimp from yesterday. Sometimes there is that, or we were working on it. And sometimes you can kind of pick your day one sometimes, can't you?

Yeah, totally. Like, I mean, if you look at Figma today, it looks like they started in 2014.

Yeah. And some will even say 2014, 2016. They'll do, they'll do some of these. So I want to go on to the next point, but to wrap this up, is this I know we're processing real time. Do you think this will create more optimism, especially in growth and later stage? Doesn't it almost have to create a little bit more optimism?

Like, I think— look, I think it's— yes, this is what we all aspire to, right? A lot of founders and investors aspire to this. And you just got to look, you got to pick an industry that ideally has a non-cloud native incumbent that is worth a ton of money. Right. Like they had— he had an incumbent that had $100 billion market cap that has, what, 40% EBITDA. It's like an incredibly profitable, incredibly profitable segment to be in. And they're not a cloud-native company. Right. They tried really hard to get into cloud, but they have this massive open flank of a competitor that's cloud-native that is beloved. So if you can pick— I mean, there's tons. I mean, that's another thing we do all the time at Cowboy is we analyze like what categories have really old, slow-moving incumbents where people don't really like the product. That's a great place to build new software.

It is. Yeah. Interesting. So, but do you, do you, do you think that this will lead to a few percentage points more optimism or you don't think so?

No, because I mean, you still look at Snowflake and Datadog and all the companies we talk about, right? Like best-in-class companies now that have a clear path to profitability. They have really good margins. They're trading at 15 times revenues if they're like—

if they're lucky, the communities and boxes are 3 or 4 times.

And so I mean, that is the bizarre, like, unfortunate reality for some this year is last year people were able to raise 100 times revenues, right? This year, best-in-class SaaS companies with great margins and great ACVs and great NDR are trading at 10 times revenues. So the old adage of get like, you know, build your product with your seed get to $1 to $2 million in revenue and then raise your A. If you can do that, last year you would have raised at $60, $80 pre, you would have raised a $20 million Series A and be at $100 post, right? But $100 post at $1 million revenue would make you like your valuation 100 times revenue. That's just not going to happen unless you have a ridiculous story to tell. Maybe you were like VP of engineering at Stripe or like, you know, those people will still probably raise at high valuations. But for us regular people, I think Series A's are going to be back to $8 to $12 million, and Series A valuations will be back to $20 to $35, $40 pre.

Yeah.

And B's will be back to $100 pre instead of $400, $500 pre.

Let's, let's unpack that just a little bit.

Sorry.

For, for seed— no, no, no, it's, it's great insights. For seed, if you had to distill it all, yeah. All the market changes, how much lower do you think a typical good seed deal is today versus 6 to 9 months ago?

Today we're still adjusting, right? Like, I— right now we're seeing a lot of seed extensions. We're seeing a lot of seed founders who are sending us decks that have a $6 million seed raise in them. And I'll email the founder, be like, hey, this looks really interesting. Are you still thinking about a seed, a $6 million seed? And they'll be like, oh no, sorry, that's a mistake. We're raising 3. So we're still adjusting. And I think that that's going to be the rest of this year.

Got it. Okay.

Are you seeing the same thing?

I don't know. I think let's spend some time going through the stack of letters for the round. Yeah, I think you're right. I think the other point you made in some notes to me was the weird effects of overhangs, the weird effects of not founder-led funds. Founders that have $100, $200 million of their own money to deploy and the confidence of a lot of folks in the next Figma being relatively valuation— I mean, I wish I had the data from this YC class. I'm sure it's down. Yeah, but I bet it's pretty good. I bet the valuation— I bet there are plenty of people that were thrilled to write $20 million post-safes in very risky early stage and have no qualms, right?

No qualms at all. I do think some of that speaks to like what we called, like we derided them as tourist VCs. And that's not very respectful, so I won't use that term. But I think there are a lot of people who have not seen cycles before in the industry right now. There's a lot of like basically as these funds got bigger, they had more fee income and so they could feed more mouths and they would hire younger people and say, you have a checkbook, like you don't have a big checkbook like I have. Like, you know, the part the general partners could write 20, 50, $100, $150 million checks, the younger people are given checkbooks to write a $2 million check, a $4 million check. That way, if they don't work out and you let them go, you're not actually losing that much money. And it's kind of like training wheels for the next generation investors. And so a lot of those folks have not seen cycles. They only understand the world we've lived in for the past 3 to 5 years. And so for them, going from a seed that was at $50 post to a seed that's at 25 post is like, cool, it's like a bargain. But they don't realize that things are still going down. And so I think we're still in this adjustment period.

Yeah, I think we're— I think we were talking about— I think most founders are through this. And again, being funded at all is a luxury and a privilege in many ways. There's many bootstrap folks here.

Yes.

You get to millions without it. I think we're— founders were slow to adjust to the change. They were— they were— they've been slow. And I think they're just— and I think the biggest risk and is the next round, right? What if the next round went from— because last year in 2021, everyone assumed the next round was coming. It's not just that it was at 5x in 12 months or 100x, it's that it seems so de-risked, didn't it? It seemed— everything seemed de-risked out of the system, didn't it?

Yeah, yeah. We were joking this morning. So I had— I'm in AllRaise, this is nonprofit that I work with, and I'm in this cohort with other investors. And I was telling them I was coming here and I was saying how like, I feel like in the last Downturn in the recession in '08, we talked about how flat is the new up. And I was like, is flat the new up? And we were like, no, any money is the new up. Next rounds are going to be hard.

Yeah.

And I think some people are not going to be able to raise them.

And how do you— how do you— what's your just general advice for— and I think you put some notes about talking to your investors, talking to board members. How do you find that out as a founder? How do you know if in today's world you're fundable? How can you— How can you just— because we just want to know the answer.

Yeah.

Where do I sit in September 2022 or whenever people watch?

And that kind of speaks also like I have always been a big fan of an engaged board. Yeah. And the past 5 years we've gone through this cycle where it's like you don't need a board or just like get easy money or like— and VCs have been chasing all of you and it's been super competitive. Like it's been a founder like, founder-dominated market. So a lot of investors have gotten scared to have real talk with founders because they're afraid the founder's not going to like it, and then the founder's going to shit talk them behind their back and then be like, oh yeah, you don't want Jason or Aileen on your cap table. They're a total pain in my ass. And so then founders got really, like, used to just— I'm sorry, funders got really used to just blowing smoke at founders because that's what founders wanted to hear, like, not the hard stuff. Not the stuff that we need to work on, or you have a blind spot, or where you're like, you're deluding yourself. And also a lot of the, you know, less experienced investors, they haven't been through this before. So if you have a board, if you don't have a board, I would get a board. If you do have a board and people are not giving you the straight talk, ask them for it and tell them that you want it. And if they don't know it, like they may have colleagues who've lived through— get also, I think, independent board members and outside board members are totally underutilized by boards. Like, get someone— if go-to-market is your big risk, get a great person who's got go-to-market experience on your board, who's lived through cycles and understands how budgets tighten, how sales cycles slow, how cash, like, gets pushed out, and like how you do collections. All the ticky-tacky stuff that you've got to, like, live through. The hard way. I think that's the way you get the— because you have to come up with your battle plan.

Yeah. And just— I know this almost sounds like a base— like a silly question I've asked years ago, but today, how— if people aren't having board meetings or investor meetings, how often should they have them?

Oh, yeah. So you made some good comments about how you're seeing a lot of sloppy board behavior recently, right?

I just— I'll give you one company investment. It's doing well.

Yeah.

It has like a really fancy venture fund in it, but the partner lives at the beach now. It has another really good fund, but it's, it's run by a CEO. The last board meeting was 4 months ago. The next one hasn't been scheduled. They don't care. I mean, they've done well. One's running a unicorn and one is a very successful VC who probably did too many investments. Yeah, right. And so nothing's— nothing's scheduled.

It's— well, the other thing to add to this dynamic is that investors, LPs in venture funds, have basically put on the brakes. And so any fund that is trying to raise right now is having a pretty hard time for the most part. And they're not going to tell you they're having a hard time raising money or that they're going through a grueling fundraise. And but that does play into their dynamic of how they communicate with you because they need you, the founder, to be a reference for them. And so like we have one portfolio company where like we're off plan and it doesn't feel like the founders, the velocity of shipping is not at the place where it should be. And I'm not on the board. I'm an observer and someone else is on the board, and I called the board member and I was like, hey, what's your feeling about how this— like, what kind of coaching are you giving the team about how things are going? It feels like things are off and we are not doing the things we should be doing. And he was like, I got to be honest, I'm raising a fund right now and I cannot afford to have a bad reference from these people. So I'm not telling them anything.

Hmm.

I had— that is not the job of the board member. Like, that made me really pissed off.

I had not. Thought through that VCs' own investors, their LPs, would be a cause of this overly saccharine approach to founders, right? There is a— it's so like when we started, when I was a founder, I felt that VCs are the most patronizing people I ever met. They would condescend to me, young Jason, no matter how old I was, young Jason, this is how you do it. Like, just, you know, the, the jacket preparing for months for the board meetings, and now everyone smiles. I missed the quarter. Great, great, Bob, keep going. We actually had no sales last month. Okay, keep at it, keep at it, kiddo. And like, I'm trying to figure out what the hell's going on. I get more, as time goes on, I get more direct. I get more empathetic, but actually, like, I don't have time to do, hey kiddo. I'm like, look guys, you're fucking up, like, just change, right? But I thought it was more just general reputation, but maybe it's LP. Maybe they're worried that their own investors will call.

I think it's both.

And not get all the checkboxes and they'll go with, you know, Cowboy instead of somebody else, right?

I think it's both.

Yeah. And it's not to get too niche. Maybe we're back in a world. It seemed like this went away where actually VCs are competing with each other again for LP money, right? Is it? Does that exist today or is that from the old days?

Yeah. I mean, I think it's not. But yeah, the LPs, the invest— the LPs are— I'm gonna go too much in the LP side, but it's really interesting because let's say if you had $100 and you're an LP, right? You're gonna say like, I'm gonna take 10 of it and put in real estate, 15 of it and put it in debt. Like you wanna have a diversified portfolio, right? And I'm gonna take 20 of it and put it in private equity and venture capital, maybe 10 in venture capital and 10 in private equity. I'm gonna have like, let's say 40 in stock, right? Right? And you always want to have this balance of your holdings. Well, stock, let's say if you had $40 of your stock, of your $100 in stock, and the market has contracted. So now your $40 is worth $20 in stock. And so it throws off your whole portfolio. And so your venture allocation, which was already potentially overvalued because you were sitting on these really expensive private unicorns and all these, like, undistributed public stocks, stocks, it now looks like a bigger chunk of your portfolio than it used to. So it means you don't want to, like, you don't want to overspend your budget. You said you only wanted to have $20 in venture, but now as a percentage of your portfolio, it's like 30% of your portfolio. So they're having to kind of like restrict themselves in the first place. So it's just a really funky domino effect.

I think that's the thing for founders. Founders don't need to know everything.

You don't.

Yeah, yeah. It's worth knowing two things. Most, almost all VCs have their own VCs called LPs.

Yes.

They have their own VCs they have to report to. And it's actually worse because VCs, VCs, the LPs only view you as a number. They only— I remember the first LP meeting I had, it was like JPMorgan Chase or something. We went into this meeting and he just flipped to the last page of a 90-page deck and just looked at the numbers. Didn't care. He's, you know, he walked in, he says, are you guys IT or healthcare? IT?

Yeah, totally. We're basically like—

Not good enough. We're looking for top decile. You guys, he just ended the meeting.

I mean, we basically, all of us are basically like stocks in their money.

The stocks, weird stocks, really weird stocks, right? And so I guess you— it's worth knowing they have their own investors, and it's worth knowing you don't need to figure it out all because there's a lot of investors, but there are stressors, and the stressors will vary. Some are more stressed, some are less stressed, but there's stress in the system beyond valuations that didn't exist a year ago, like this stress, right? Um, yeah, yeah, yeah. And the other one that I wonder, not to go off on a tangent, but, you know, do you You have so much better data, or at least historically. But do you know what the average top-tier university endowment in venture did last year? The IRR?

Last year was incredible.

90%.

Yeah.

So I actually think it's not just the denominator, numerator. I actually think LPs got— believed they were as brilliant as the VCs believed they were. I think LPs thought this— everyone thought this world would last, didn't they? For longer than it did.

I don't know if we thought it. We hoped it would.

Hoped it would.

That's different. I mean, everyone— I mean, if you look at like you're going to do the Bessemer Cloud talk, right? You're going to look at like, where are we? And it seems like in all likelihood, the multiples of last year were just an outlier.

Okay. And so then why did they do all these investments, these VCs? Why did they do it?

Because it's such a good way to make money. I mean, people made money, right? So and we look It all is not lost in any way. Like, software is an incredible business and software is an incredible enabler. And it's not— it's only going to go— I mean, the pandemic unleashed so much more opportunity for software. I mean, obviously unleashed so much pain and is still— so many people are enduring from the pain. So, but like healthcare, govtech, edtech, SaaS, back office processes, what's going on in AI. I mean, what's— what we need in security, what we need in like how PLG has changed, what we need, new CRM. There's— it's an incredible business. So I'm glad we're all in software.

What do you— just to go back to an early point, I was— I've been meaning to write this SaaS blog post that I haven't written, but it's something like either 2021 was the year SaaS got easy or 2022 was the year it wasn't easy anymore. And what I mean by that, it's never easy, right?

Yeah.

So many— there's 200 sponsors here. But in the old days, which is like through maybe 2018, in the back of your mind, you're like, to be a— to raise a billion, I need to get to $100 million in revenue.

Yeah.

And that creates a series of pressures, right? Because you talked about a Series B going back to $100 million. I mean, the amount of pressures. So Let's just go back. If C is murky, but you think to raise a B, so your third round of capital, instead of being at $400 or $500 million, might be at $100 million, $200 million. So what sort of compression amounts you raise, like, what is, what is that? What does that mean? What do you think you— or since you're writing the article, what do you think a real unicorn needs to be next year? What do you think a unicorn is gonna look like in 2023?

I mean, I still think, I know there's been a lot of like there's too many unicorns. I still have always said this, like, I think building a billion-dollar company is incredibly hard and incredibly special.

Yes. It didn't feel that way last year, did it?

It's still not. I mean, even the people who are, who, who are running the companies that are worth 5 or 10 would not tell you that it's easy, right? It's crazy stressful. You have to be really lucky. A lot of things have to break your way. And so I guess we're going back to that place where there's going to be less unicorns every year. I do think next year, like when we, when we did the original unicorn analysis, we looked at kind of vintage birth years and like what were the best years to start or found a unicorn. And generally downturn years are the best years. I think just, you know, you've got to be more committed to your idea. You know, it's going to be hard. It's not a get-rich-quick path. And so I think that is kind of imbued in the culture of the company. And in the hustle and the scrappiness of everything you do. So I do think next year is gonna be, like, from a venture perspective for us, next year is gonna be an incredible vintage year.

Okay, two things I wanna hit. If you guys want, I think we have time for 3 or 4 questions before the next session. We do. So think we got— I'll try to go 5 more minutes and then get you guys some questions, so feel free to join. But just a couple— one maybe slightly fun point, and then I wanna talk about the overall dry powder and overhang.

But I like that you made like 20 slides and we're both—

first, sometimes you never know where it goes on the third day. We can get through them all if you want. Every VC today seems to be a discounted cash flow interest rate expert. I didn't hear anyone last year talking about interest rates and DCF. Do VCs even know what they're talking about? Like, I kind of want to like pull my hair out when I hear everyone all of a sudden saying rounds don't make sense at $300 million because interest rates are at 4.6%.

Yeah, it's a really funny— like, raise your hand if you understand like how interest rates and discounted cash flows impact SaaS valuations.

My arm's staying down.

Okay. So yeah, it's funny. I've actually— over the past year, I've drafted this blog post like 5 different times. It's just so hard to explain or like it's not— it's like I just— the writing is really boring. So basically, I was fortunate to start my My first job after college was I was an analyst at Morgan Stanley in mergers and acquisitions. And so you're basically like a model jockey and you learn how to use Excel really well. And so basically you look at how much cash a company is gonna make every year and you take an interest rate and then you kind of add stuff to it. So if the interest rate was 5%, that you might turn the discounted cash flow rate into 15%, let's say, right? And then you basically discount all the future cash flows to today using the interest rate. And so let's say like $1,000 worth of cash in the future is worth $100 today, right? So what happened is we used to, and still a lot of public company stocks in traditional markets trade on multiples of cash flow, right? And the best, on the P&L, the best proxy for that is EBITDA or EBIT, okay? So what happened kind of in a weird subconscious way is because SaaS companies have such good margins and when they get profitable, they do throw off so much cash. Revenue kind of became a proxy for EBIT. And so we started looking at software companies on a multiple of revenue instead of a multiple of EBIT. And also because SaaS, the whole idea is like you invest a lot in the front, so you lose a lot of money in the back and you make it all later. It was too hard to look at EBIT because people had so much much above the line that they weren't, they weren't generating good margins in the first like 4 or 5 years. So we moved to multiple revenue as a proxy basically for like the future profitability of the company. And so when interest rates are zero, they're like the discount rate is a lot lower against your future cash flows than when interest rates are where they are now and where they're probably going. And so basically that does impact how like when, if we're lucky enough to be working at a company that becomes public, financial analysts and research analysts are going to cover your stock in terms of how— what are the margins of your business and how much cash you are generating as a company, because that is actually what they really care about. Yeah, sorry, that was really long, but that's what I did.

But did, did all, all of our brilliant VC friends, many of whom today, did they really think interest rates would be zero forever when they were doing these rounds? I mean, I certainly never— I certainly thought it was a gift, right? It's—

well, it's kind of like there might be some analogies to Web3 and NFTs and crypto. Like, it's specu— I mean, it was speculation, right, for the phase that it was really crazy.

It was speculation.

People were making tons of money.

Yes.

And so when things are going up, that's a good time. If you get in and out at the right times, you can make a lot.

Yeah. My sign of speculation in venture is when the pre-seed investors won't sell at a billion. The market's changed at the peak. When in the old days, when I started investing, I met you and I met some of the original seed investors. They're like, you know what's great about being a seed or pre-seed investor?

You can get out. You can sell.

Like if you're Accel or Sequoia or Bessemer, you can't sell in the series. You actually have to put more money in. You have to support the company to a billion. But these valuations are so crazy that little, little, you know, Lemkin—

We actually can do a favor for the founders because they want—

sell. You know, when you're sold, no one cares. They raised opportunity funds and they invested it a billion instead of selling, right?

Well, that's, I mean, that's why Sequoia went to this new fund structure is because they did the analysis and they showed that by selling too early, they had left a lot on the table.

Yes.

It's gonna be interesting to see how that plays out. They're very smart people, so I don't, I think they probably know what they're doing.

All right, last follow-up on this and then we can definitely take some questions for a few minutes. And maybe we have, I know we skipped a lot of our slides, but let me grab one as a prop. This one, okay?

Yeah.

Here's our revenue. We talked about revenue multiples. I probably should have thrown this slide up. I grabbed this from Bessemer, who's speaking next, but historical current revenue, not next 12 months, current multiples, and they're back. You don't have to see all of it, but we're basically back, depending on how you look at it, somewhere between 5 years ago. Possible reversion to the mean. Do you think if we're in the middle, like, it looked like we were gonna do better, like multiples maybe weren't like Crazy COVID. But yeah, you think we'll be— come back to the middle and then venture's good, or do you think we're stuck back in the old days?

I don't think we're going to go back. I mean, I don't think we'll go back to like whatever the beginning of the— what the far left is. I think they will end a little bit higher. We'll expand a little bit higher. Yeah.

Yeah.

But I think I'm a hope for the best, plan for the worst person. So, you know, if we were working together, like we could hope that that's what's going to happen. But from a burn perspective, from a like a revenue, from a plan perspective, I would plan for things not to get better and make sure we can survive. And then if it wants to be better than that, we're in great shape.

But at some level, so I think that's what you've got to do as founders and as plan for the current world. Yeah, maybe not. Maybe not too much worse, but a little bit. But you do. But deep down as an investor, you think we'll see some improvement in multiples over the coming, coming 2 years?

Yes, I think I think the software industry becomes more sophisticated and more efficient and the margins get better and the companies get better run in cloud and just like AI, like it's just going to put so much more leverage on the system versus like, like, I mean, I know these are SaaS multiples, but like early SaaS was much more expensive than SaaS today.

It's true. All right. Anyone got some questions you want to ask? You can try or come up to the mic if you've got one. Don't be shy.

Yeah. Time to talk about what you want, what you came to hear about. Like, if we didn't talk about what you wanted to hear, ask us a question about what you want to know. Can you stand up a little bit? It's hard to hear you. Yeah, yeah, yeah, yeah.

So maybe is the question that will investors actually even care about profitability? Is that, is that the question? Oh yeah.

Are you talking about gross margins or net margins?

We're not going so far that early-stage investors care about profitability. We haven't got that far down the multiple hole.

Like once you're past post-Series B. Yeah, that's when you're having the conversation about at your board, with your board and your investors about path to profitability. Yeah, I would say for the, for like seed and A, I think seed is about ship your product and get to product market fit. Right. And start to get a sense of what the margins of your business are, who your target, like who's your ICP and do they love it. Right. And then A is really like, you know, can you get from you know, let's say, you know, from post-seed, let's say if you're at $1.5 million or $2 million when you raise your A, then you probably need to get to between $5 million and $10 million in revenue during your A, which is a change from where we were. And, you know, there's just— it gets harder every phase in different ways. But I do think the fundamental gross margins of your business, people are gonna ask you earlier than they used to. And then, you know, how much you are spending on— and there's so much we could talk about. Like, you know, I think customer success, customer support, like that— there's still so much opportunity in that. I think we're, you know, we have some good software, but there's still a lot of opportunity to build a lot better software for kind of like not just the sell-in. Like, I feel like we've had a glut of sales tools in the past 5 years to help you sell in. And there's going to be a lot of opportunity to help you sell through. That everyone's going to focus on because it's just much more efficient to work on land and expand and keeping your customers than going to get new ones.

Let me maybe just spin a version of the question on, on, on margin for your top investments, the top ones that are also very well funded. Yeah. Have years of runway.

Yeah.

Is there pressure to be more capital efficient today to not spend it or just for that elite like growing like a weed and well-funded? Do all this talk about profitability and sales and marketing efficiency and has anything really changed for those ones?

Like, I think last year, so like yesterday, I don't know if any of you went to the Drata talk yesterday. They're growing like crazy and the product is amazing.

Yeah. Any pressure there?

One of our portfolio companies, Mutiny, is here and they have a booth and they're going like crazy and they did a big round last year. And I think they're great. They're in good shape because they've raised a bunch. They've got years of runway. The margins are good. Customers love the product. The product. But yeah, I mean, you— we— it's not as like right, right now. A year ago you might have had a conversation about should we grow 5x or 10x next year? Right. And that was really the conversation of how— how well, why wouldn't you grow 10? Like, do it. Why wouldn't you? Right. And right now, now the conversation would be like, well, tell us the tradeoffs of how much do we lose if we grow 5x? Versus 8x versus 10x, and what are the margins, and who will you be signing, and what's the retention going to look like, and like, are you being— what's your revenue quality? I think that's a conversation.

I think that's an important point on the topic that, yeah, it's like a year ago, maybe no one asked any questions. They didn't care what your gross margins were. They didn't care if they were 10% or 90%. Yeah, just grow as much. Now, if you're a top tier, they want you to grow, but they do want to know the quality of revenue, right? But I think— and then just where I think founders maybe get bad advice on the internet is that profitability is so in fashion that somehow lower growth is better. That like now if you're at $2 million growing 40% but profitable, that that's— it doesn't make it an attractive investment in this climate, does it?

It's still hard because you have to have both now.

You have to actually have more of a full package.

Totally. So it's not like don't worry about growth. That is bad advice. Growth is still very important.

Yeah, there's, there's extreme. So anyhow, that's just where I think profitability— people just want efficient growth today. There's tons of venture capital, isn't there? But inefficient growth is reserved for a, for a tiny elite.

Yeah.

Versus last year, inefficient growth was, was available to many.

Yeah. Yeah. That's another thing I guess about the VC dynamic is like there is a ton of venture money, like there's a ton of dry powder sitting on the sidelines.

Yep.

And it's almost like everyone went to a really big party. They drank way too much and they have a hangover. They woke up and they're like, okay, I should not drink for at least a couple of days. Basically, that's 2022. And so they'll be back. It's just that. But I think raising right now, if you can avoid it, because there people may be also trying to kind of cost average down their portfolios like they paid too much. And so let me underpay now so So I kind of wind up in the middle. And so like, if you raise now, if you can avoid it, you're going to be getting a lot of bottom fishers who can afford to sit and wait a little bit and kind of reassess and see where things settle out and then get back into the market.

Good point. We probably have time. We can do 2 more questions. Anybody else have one that we want to ask? Oh, go ahead. Microphone. We'll try to do 3 if we can. Yeah. So I had a question around how to properly do valuations for different verticals and growth rates, because I keep seeing like that chart where everyone's just like, no, now it's 5x. Yes, this is it. Yeah, but we're growing really fast. We're enterprise, we're big data, we're all these things that I think should add to valuation. So how do we properly factor those to make sure we're getting a fair price?

Well, it's— I mean, you have to go to market first of all, but it's not 5x. Like, look, if you are raising a Series A and you're doing $2 million in revenue, you are not worth— generally, you are not going to be raising at 10 pre. That's just— that's not happening. So there is a— there is a private premium for sure. But I think you've got to go to market and see what the market tells you. That's usually the best way to do it.

So almost create a bidding war of sorts.

Well, as investors, we hope you do not.

But here's the thing.

Yes, you got to— you got to— you got to test them. When we work with portfolio companies, we'll often tell them to kind of go off-Broadway first. Like, you know, you practice your pitch. Right, with people who you don't think are a good fit or unlikely to be the people that you want to work with. Because the more times you give the pitch, the better you get at it. But you also then get feedback on what the questions are and like what people are thinking in terms of valuation. And then you kind of do your Broadway pitch.

And my view, for what it's worth, I'd be curious your thoughts, is no matter what happened last year, I think all the time I've been in SaaS, including the founder, there's been an anchor valuation, which is 10x ARR. Okay, now it's gone up. Okay. And maybe that was 20x during the peak. But at the end of the day, if like you're a little— if you're, if you're fundable but you're, you're not quite at the elite level, you might fall to 5x so that someone will take the risk. Okay.

Do you think that like a company doing $2 million in revenue is going to raise at 10 pre?

No, no, at 20. 20x.

Sorry, 10x. Sorry.

I think that's— that is if you're not in the bubble, if you're not from YC, if you don't have elite founders. I do think for my whole career that's been an anchor point and you can anchor up based on You know, oh, hey, I was head of marketing at Gusto. I was this, I was that. You anchor up, or you might anchor down. No one's heard of me. I'm self-taught. I have no pedigree, fancy pedigrees, and you may get a discount. But I still think that in today's world, I think it's good to go back to that and then just look, if you hit that in venture, the math pencils out for everybody. And if you get more, great. And you may come up short. And that's a lesson that you're not hot. Like you're not checking these boxes.

As you said, like for the next 12 months, any money is the new up, basically. So I do think, but I also think there's an element of like, How much do you want to raise and how much dilution are you willing to take and how much does the investor want to own? Like, that's part of the calculus as well. Yes, where the owner, like, they don't want you to sell 60% of your company in a round, right? That's not going to give you the right incentives, and they probably don't want to own 40% of your company. So like, that also helps push the valuations up.

Can I— my question is, I love the comment about the old slow incumbent. —have you— that's about your pre-product thesis. And my question is like, how do you break down that dangerous problem in your thesis, your method? And if you do build together an idea problem with second-time founders?

So the first one is how do you break down like that there is an old lazy incumbent that's worth a lot of money? I mean, it's a— put it in your pitch, right? Which is like, here's the product that people currently use. This is what they say about it. This This is how much the company is worth. This is their margins, especially if it's a public company, right? It's got an old UX. It wasn't built for the cloud. It doesn't work well on mobile. It's super latent. Like that's— and like NPS of the product or reviews on the G2 Crowd are crap, right? So put that into your story. Okay.

And the second time founder, if you build together, like you analyze the industry, find a big problem idea, be a second time founder and do together with them. Is what's the power of second-time founders? Second-time founder. Like, would we invest in that? If you— yeah, if you build a company together.

Great. I mean, yeah, I think it was funny. We were talking about this 10-year unicorn analysis because when I did the original unicorn analysis, I had this like crazy spreadsheet of like, where did the people work before? How old were they? What was their job before? Where did they go to school? I even looked at like birth order and star signs. Like I was trying to figure out like all kinds of crazy stuff. And one of the things that, like, in the original unicorn analysis, that one of the things that most of the founders had in common is they were serial entrepreneurs. But it could have been like in high school I started a lawn mowing service and then I was like, yeah, babysitting on the side while I was doing my first company that failed and my second company failed. Like there was a lot of failure and or like not big hit outcomes. In people's pasts, but it showed that they just had the drive and the hustle and the entrepreneurial spirit. I think that's like— I tell my kids that all the time. I'm like, look, like, you know, you're juniors in high school, you should start something. It's really fun being my kid, as you can tell.

I think it's a— for what— I think that's such a good point. I think that, look, there are VCs that love second-time founders. Yeah, they're like— even me, like, my first startup I sold for $50 million after 12 months, so all my investors gave me another check, right? That's how you do it. Yeah. And the price went up, right? But not everyone likes that because sometimes they spend all the money and it's expensive. There's pros and cons. But Aileen's point is great. Most of you are a second-time entrepreneur in some sense. Yes, we all want to hear that. It's not just the dumb founding story about Pez. We want to hear how you've been working on this problem for years and whether it was truly— you exited for $20 billion or it was just something you worked on as a side hustle or, or you worked on it somewhere else. We want to hear that you have 3 to 4 years of domain expertise and Yeah, even if it's an entrepreneur or something, that's what's very compelling to investors. So find that.

I know we're running out of time, but one of my biggest shadow portfolio misses is I brought Jack Dorsey in for the Series A of Square at my former firm. Oh, and he had been fired from Twitter. And the references, like, you know, we did very comprehensive memos. I had a binder, a diligence binder, and they were— and the references were like, this guy is untouchable. Why would you— he is unhirable. Why would you ever consider working with him? Like, you know, he's a disaster. He's a nightmare. And so I got shot down. I think about that all the time, that I should have done a better— I should have figured out how to get us. And then I brought him back for the B and we passed again. So that was a big miss, not miss investing in Square. Now, the caveat to that is like white guys get second chances all the time. And so if you're hiring people and if you're building your company, just make sure that you are giving everybody a second chance, just not certain— not just certain people. All right, last question.

So my business, that's, you know, that it's like a marketplace where I'm connecting startups and small businesses with flex sales talents. I've been doing this for the last year. We've done around $600 grand from a GMV perspective. Specifically, when it comes to marketplaces, What are some of those key metrics that you're looking at at that pre-seed or the seed stage? Do you know? I'm not in a marketplace.

Um, for you anyway, but— well, for marketplaces, it's— there's a pH balance, right? You have to figure out like, what's the rate limiter? What's harder? Is it supply side or is it demand side? So being able to articulate like what's harder, is it harder to acquire on the sell side or on the buy side? And then figuring that out, like what starts the virtuous cycle, how much does it cost cost you and what have you figured out to unlock the virtuous cycle is really important. Because getting, like, you know, getting that going is the hardest part of marketplaces.

Yeah, thank you. Sure. The only small follow-up, and then we'll break, is just if you're talking to real SaaS people, just know, know your, know your investor. Like, I don't know what— I mean, I've invested in companies with GMV, and I don't know what they are, and I don't know how it works, and I, I'll never know. You have a broader background, you'll understand it. But like, I I only want to know your AAR.

I'm an omnivore, so definitely if you have some random— there's no Tam, definitely call me.

Know thy investor. But all right, let's thank Aileen.

Thank you so much for coming. It's always so fun. Thank you.