What the Future of SaaS Holds with David Sacks, Founder & General Partner, Craft Ventures

So much I want to chat about. Even frankly, I want to learn in a few minutes down the road why you even have the enthusiasm to start another company. Right. I mean, I could be— I feel like I'm high energy and I could barely keep doing what I'm doing. Yeah. So I want to get there. But in order— but before, like, let's talk about— let's talk because we've both been doing this for a long time. AI. Yeah. First of all, from a Kraft perspective. So, I mean, Kraft's a big fund now. What's your assets under management? $1.5 billion. We're at $3.3 billion. Yeah, that was fast.

Yeah.

Is that a record? Over $3 billion?

I don't know if it's a record, but yeah, it is pretty— now, I mean, half of that is in new funds that we haven't deployed yet.

So, okay, actually, that's a topic we come back to. But okay, so $3.3 billion. When you guys are talking each week and it's— Kraft is still very B2B focused, right? Majority B2B. How much of this combo is about AI? Is it all AI? Does it have to be AI first?

It's about 80%.

80%. Yeah. Okay. And if I want to—

for new stuff, what's that?

For new stuff.

Obviously, we have a large portfolio of founders that we need to keep servicing. And yeah, most of that is not AI. It was pre-AI, right? In terms of looking for new ideas, I think the team is spending 70 to 80% of their time looking at AI.

And if I had like the world's best payroll app, could I get a meeting at Kraft?

Yeah, absolutely. That's—

I'm not being facetious.

No, no, I mean, it's the issue is that one of the questions all VCs ask is why now?

Yeah.

So, you know, there is a tendency, if you think about every major platform shift as like kind of a pond and the pond is kind of stocked with opportunities, it will get fished out over time.

Yeah.

You know, the best opportunities over time will get taken. There's always this question of why is this idea still available to the founder to be exploited? And, you know, it's been Before AI came on the scene, it was what, roughly a dozen years since the last really big platform shift. We had a couple. We had cloud, obviously has been huge, and then mobile. There was also social, although that mattered a little bit less in B2B. So there was a sense that SaaS was getting a little bit long in the tooth as a wave, kind of multi-tenant SaaS, and we needed something new to come along to kind of reset, you know, kind of restock the pond with opportunities.

Yeah.

And I think that's AI. At least that's the way most VCs—

What do you guys— and what, what has made your jaw drop or what gets the team excited for, for Reelz, right?

Well, we have seen a bunch of like cool demos in AI that, you know, have been pretty impressive, although a lot of them are more prototypey. I would say that we've kind of divided the AI opportunities into 3 buckets. There's infrastructure, which is super hot, and you're seeing rounds, massive rounds get done at super high valuations. Ultimately, my view is that infrastructure can be owned by the big tech companies, and those mainly are plays for a good M&A exit.

Yeah.

Second bucket is copilots. And I think this is the area where actually startups, founders can start new things that the big companies really aren't going to go after. I think there's going to be a copilot for every professional job category. You know, you've already seen a bunch for lawyers, you know, doctors. I think, yeah, architects. I mean, I think there'll be, again, copilots for everything. And then there'll be copilots for horizontal job functions, marketing, sales, so forth. Third category is pre-AI SaaS apps that get turbocharged in their value by adding AI functionality. Doesn't mean they're going to be like the deep, you know, the sort of a foundation model. It's more like they get to exploit all these new AI APIs to make their product better. We've seen like the killer Notion AI demo where it autocompletes everything. Our portfolio company ClickUp just released some similar functionality. I think that, you know, apps like Gong or Chorus are going to be turbocharged with the ability to analyze all that conversational intelligence. That they're recording. So I do think there'll be a lot of, again, pre-AI SaaS apps that just get a lot better because of this functionality.

Yeah, no, I'm with you, but it's interesting. I think what you said maybe to help founders is really the moment in time. Crabs got over $3 billion under management. You're spending 70-80% of your time on new deals on AI. But a lot of the stuff is just past demo ware, right? So it's an interesting mismatch where unicorns have been reborn here.

Yeah.

But we are, we're getting very excited early.

We're planning on deploying our current funds very slowly. Slowly. So, just because it's what we're spending, again, 70-80% of our search time. Again, we spend a huge amount of time just helping our current portfolio. But in terms of the search for new ideas, just because it's 70-80% of our time doesn't mean that we're instantly going to be piling. It's going to take a while for this stuff to play out. We've only made, I'd say, a couple of— well, we've made a few seed investments. Seed checks are a lot easier to write right now. I think we've only written 1 or 2, you could call them Series A type checks.

1 or 2 this year? Yeah. Yeah. Let's take 2021 out of the equation. How does that compare to your average pace, 1 or 2?

I think that things right now, they're going back to more the pre— 2020 and 2021 were simply a bubble. Yeah, it was a massive bubble, especially the second half of 2021. Valuations were crazy. Rounds were crazy.

It was worse because actually the metrics were already cratering in 2021, but we kept investing until, until New Year's Eve.

I didn't, to be honest, I didn't. There were a lot of companies that we saw that actually had very good metrics in 2021. I didn't see the metrics start cratering until mid-2022.

But I think the macro, like if you look at Shopify and Zoom, yeah, they had already reverted to normal.

Yeah, right.

There's this bubble was we weren't— we were ignoring the fact that we'd returned to the normal world quicker than we thought.

Yeah. So, so you're right. So the, the businesses that got accelerated by COVID were already reverting to the mean. I think that in terms of the financial markets, everything peaked in November of 2021. That's when the Fed started turning really, really hawkish. And indicated that they would be raising rates, but the rate hikes didn't start until about March. Q1 was still this last gasp of people able to get rounds done, maybe not quite as good as in Q4.

It was nervous, but it was happening.

It was still happening. I would say by Q2 of 2022, it was nothing but a falling knife. Then what I started seeing is— my portfolio companies, I think, were still hitting their, their forecast by and large. It wasn't until the second half of 2022 that every board meeting I was at was like an exercise in reforecasting down. And that was the part that was a little bit surprising to me, is how much the Fed's, you know, crazy loose money ZIRP policy was inflating the metrics of like every company all the way down to kind of early-stage software companies.

Yeah, well, let's come back to that.

But so just for—

just to be technical and venture, because I think it's still an opaque world for founders.

Yeah.

So it is interesting, even if it's sometimes boring to you and me. 2 deals a year, right?

Well, I mean, I think, I think, you know, the last year was a really slow period. I think I would say that our expectation moving forward is that we will do, call it 1.5, I'd say 1.5, which means deals per quarter. Okay, so 1.5 big A's. Yeah, let's say, let's say leading a Series A or Series B, so call it 3 every 6 months. Yeah, you know, or 6 a year. So I guess that's one every 2 months. And then, you know, seed's a little different. I think we can do, um, you know, like a couple of seeds, uh, a quarter, maybe even 2 to 3 seeds a quarter.

Yeah, and that's, you know, just thinking about it for a moment, for, for founders here, even for you and me, the math, venture math's crazy. To think about having $3 billion under management and doing 6, you might intuitively a founder think it's got to be 60, or like— and it also means the odds, as simple as fundraising seemed in 2021, actually mathematically the odds are tough, aren't they? Do you guys know, or do you know how you model the attrition from seed day? Have you guys modeled that?

Yeah, I mean, we're still trying to figure that out, I guess, in terms of like giving you a precise numerical answer, but I can tell you, that it's based on a feel thing, it's really changed. I would say that 2 years ago, I would say every seed round looked good because the graduation rate to Series A was so high. So if you're paying 15, 20, even as high as a 30 cap on a seed round, and it was graduating to a Series A round at a $60-100 million valuation, which was very common, in 2021, you felt like you were getting a discount by investing in almost every seed round that you did. And there are a lot of seed rounds basically based on this thesis, which is we're just going to arb the, you know, the fact that, you know, there was a lot of arb going on. Yeah. Like, we know this company will get a Series A round, so we're going to invest in the seed round. Well, I would say that the mortality rate on seed right now is very high. You know, I think it's probably going to be like 80%.

That's my gut, about 80%, right? Yeah, I was— we did, uh, I did 20VC the other day, and Frank Rotman from QEDS on, who's been doing fintech a long time, he said their traditional model was 80% graduation. And kudos to someone that's very metrics-driven, but that's— as a founder, if you're planning on that today, you're crazy, right?

Yeah, I think, I think in one year, I think it's— I think the expectation should go from about, you know, 20% attrition to 80% attrition.

Yeah.

So seed is no longer a bargain. It's actually like pretty tough.

For investors, seed stuff?

That's what I mean, yes.

Because you're inherently overpaying?

Well, you might be overpaying. There's a lot of seed funds, and so I'm no longer convinced that seed is particularly like a bargain in terms of that part of the market. In fact, I think probably Series A or Series B is a better place to invest. I think, you know, the question is always the trade-off between proof and, you know, how much proof do you want as an investor versus the extra valuation that you have to pay up for that? And I think that, you know, a couple of years ago, you'd have to pay up a ton for that incremental proof because it just, you know, felt like the valuations would just, you know, hockey stick as soon as anything seemed to be working.

Yeah.

And now I think investors are more skeptical, and I think You don't have to pay as much to get a little bit more proof. I think it's okay to wait basically, just incrementally.

Yeah. That's the paradox for all of it for founders, you would wait if you could. Right. Right. When I started, the lesson I was taught is from seed to A, the valuation needs to at least double, but ideally triple. Not to be fancy or to look good on paper, but to justify the risk. Yes. Because if you have enough money and Kraft has enough money, you might as well wait. I'll pay 2x the price. For a tenth the risk, that's the biggest bargain in the world, isn't it?

Yes. I think that's right. If it is an 80% mortality rate from C to Series A, Series As need to be, what is that, 5 times?

The math just says like—

The math doesn't work. It doesn't. I think there has been a correction. The correction evaluation started with the super late-stage stuff because what happened is, the crossover investors who had come into the market, like the Tigers and so on, they just got their faces ripped off. So they basically just got out of the market. And so the super late-stage rounds is where liquidity just dried up, and then it started trickling down. And so, you know, first Series C was hard, and then Series B got hard. I mean, everyone who's kind of around earlier can look forward and see, oh, wait a second, there's no one to market my deal anymore. I better be like really conservative.

Yeah.

And it trickles all the way down, but seed obviously is the last round for it to trickle down to. And I'm not sure it's like fully corrected.

Yeah, I don't. I think folks here may feel different. I actually think here in like the virtual Bay Area where you have multiple successful founders with lots of money, I don't think it's corrected at all for the haves.

Right.

For the ones with the right resumes that came out of Stripe or came out of Yammer or came out of wherever, there's no impact.

Yeah. Right?

There's still a surplus of folks who many in any case, are gentle people, investors, and they don't care, right? Um, all right, two things I want to hit on this slide. Maybe we lost it up front, if we could bring it back. There's a lot, but these are things I know you've thought about. So we talked at the beginning, 80% of crafts thinking about AI. Other things that got exciting and maybe are less today— let's talk about the second one first. Low-margin SaaS, right? And, and you've done plenty of stuff in fintech and combination over your career. I still get confused when I meet with the founder with a 30% or 40% margin business. Yeah. How are you thinking about this today? It seemed like a perfect thing in 2021 to bolt on a low margin payments business to anything, didn't it?

Yeah. I mean, I would say to me, when I hear the term low margin SaaS, that sounds like an oxymoron.

Like it is an oxymoron.

Software is supposed to be high margin. Yeah. The insight that made Bill Gates the richest man in the world is he realized he could mass produce software at a low cost.

I don't know how we got away from that. Right, because you put a floppy disk or a CD-ROM, you print it, you distribute it to 10 million people, and it's cash, right? Right.

It's an IP business, meaning that all the expense in creating the software goes into producing the first instance or the first copy of the software. Making additional copies of it is on the margins free. The more of it you can sell, the more lucrative it is. That's the definition of gross margin. It's almost like a perfect gross margin business. There's no incremental COGS to producing more copies. As soon as you get away from that model, you're getting away from what is unique and special about software. I'd say that the payments businesses, maybe, or fintech would be one aspect. I think the other one was just all these tech-enabled businesses that was software, but it had a major physical world component. And those businesses just got clobbered in the last few years. And we've just kind of realized we didn't do a ton of it. But I've come to realize that software businesses that have a physical world component, it's very, very difficult. You know, you need, you need a founder who is a true, like, 10x operator to make those businesses work.

It's 3 times more complicated minimum, right?

Many times more complicated. You really have to pay attention to your gross margins and Most founders don't have the experience to really do that. The nice thing about creating a software startup is it's very forgiving in terms of if you're not operationally efficient, it's certainly more forgiving. Look, it's not a good place to be if you're not operationally efficient, but if you're good at product and you're good at sales, you don't have to be the world's greatest operator to make a software business work. It's mostly about basically finding product-market fit and selling.

All you have to look at is the top line and the bottom line. You can ignore everything in the middle.

Right, exactly. But if you're delivering food, you better be a world-class operator, or you will not make the margins of that business work.

What about Toast? Would you invest in Toast today?

Because it's a very low margin—

Toast is $12 billion+ value. Hardware that it loses money on, then it has services that it loses even more money on, then it sells to SMBs hardware and services, but it's profitable now at billions of top line, right, in a billion in revenue.

Yeah, I mean—

But it won, it won its category, right?

I would say at the Series A stage, I might miss that company. Might miss it? Yeah.

Too many weird things going on?

Yeah, I mean, just like it looks really hard.

They were sort of quasi-incubated at Bessemer. And I remember Byron told the story that they told him, whatever you do, don't go into the hardware business, like don't do point of sale. And they said, you're absolutely right, but to 10x, to make it work, we have to own the whole stack, right?

Yeah. But, um, yeah, I mean, there's always exceptions that, that prove the rule, but, um, but it's just hard when, you know, the thing I look at is, is there a COGS line in the P&L, you know, like, and what is in there? Yeah, because pure software businesses shouldn't really have one, but sometimes they do and sometimes they're misattributed. And then you find out, oh, wait a second, this business actually does have COGS. But, you know, the finance team buried it and, you know, in like an overhead line. And then you find out, well, wait a second, this business is actually negative gross margin. Yeah, one of the worst things you can ever discover. Is that your late-stage business, which is growing really fast, is actually negative gross margin. Because what that means is you've been selling dollars for 90 cents. So now you have to question, you have to reprice everything, meaning you now have to change your pricing of the product to get out of negative gross margins. When you do that, you might lose your product-market fit. So it's like you really got to make sure from the beginning that you're properly instrumented on things like gross margin.

Yeah, you had an insight when we caught up the other day, just for folks here, that I thought was simple and but pretty profound. If, if you're not an 80% gross margin business, if you have other stuff, right, your margins are probably much worse than you think. Yeah, I just went through this with the startup I invested in. Every— I mean, best team, best everything, but they have a blended business. And I was like, your margins can't really be 70. And they came back, well, they're 55 now.

Right. And this is what I mean by like there's In pure SaaS businesses, there's a lot of forgiveness for not being operationally the best.

Very sloppy on everything there, right?

Yes, exactly. But as soon as you're in a world of, again, these physical world components or these cogs, if you do something like misattribute a true cog to overhead, to your G&A, for example, that can be fatal because what will happen is you'll think everything is great to your Series C, And then a really sophisticated late-stage investor is going to point out, wait a second, that, that expense belongs in, you know, in your COGS. And all of a sudden your gross margin turns negative or it goes from 55% to 10%.

Yeah. Then you're not—

you're not— and all of a sudden it's like, wait a second, you don't even have the business that you thought you had.

Yeah. Let me get this next one. High-level one. We're— this is This is a term that we'll come back to later. Have we bounced off the bottom? What are you thinking in general yourself for a craft? Where are we versus a quarter or so ago?

Yeah, I think we bottomed out.

It probably bottomed out.

We bottomed out in the last few months from certainly from a public markets valuation perspective. We certainly have the Nasdaq up like 30% this year.

Yeah, that was the good investment. Leave your money in QQQ and call it a day.

Now, you know, a lot of that is based on the market. Believing that inflation has been licked. It's in the rearview mirror and we're going to get rate cuts next year. So the market's starting to price in, you know, a lower discount rate on all these growth stocks. If inflation rebounds, then watch out because the market will sell off. But from a public market standpoint, we have— there has been a recovery and that tends to trickle down to private valuations as well. So We've certainly bottomed out on the capital markets side. I think that for founders, I've started having board meetings in the last few weeks where there's like green shoots, like some companies are starting to accelerate and it feels like things have kind of bottomed out.

I don't think people are— most folks that have good businesses are saying things are getting worse, are they? Out there? Most—

Yeah, no, no one's saying it's getting worse anymore. But there's a lot of companies where there's still a lot of deferred pain. Jason M. Lemkin, you know, where they raised huge rounds in 2021, especially, and they've been burning too much money. And yeah, things may have, um, bottomed, but it doesn't mean that they're right. And, um, there's still— I think you're still going to see over the next year or two a lot of companies, you know, run out of money and die or have to take down rounds or, or, you know, restructure. So there's definitely some deferred pain in the ecosystem that still has to play out.

Yeah. Let me come back to that just to show folks here. I just picked two. I picked two that are kind of representative of what we're going through. One on the left is ZoomInfo, which is kind of like the public leader in pure-play sales and marketing. You can see they hit, they hit bottom on Q— they actually, it was just like David said, actually things held up pretty good last year.

Right.

And then they hit bottom in Q1 and then bounced back. Right. And then Zoom was obviously the craziest COVID. It turned out it looked like the greatest beneficiary was the greatest non-beneficiary of COVID Right. And they finally kind of returned to limited but real growth in new bookings. So those to me, like if you look at the most impacted, if they're bouncing off the bottom, maybe it's a dead cat bounce. Right.

Well, the companies that were doing, you know, that were accelerated by COVID, like food delivery and e-commerce and Zoom, you know, They're in a little bit of a different bucket, I think, than just like the software bucket. Those are the ones I'm talking about.

Yeah. One more quick bit on this, just because— just your thoughts. I get burnt out everyone saying how horrible it is on the Twitter and the internet, or X, because not everything's a downturn. The overall consumer economy is pretty good. If you look at— I picked Toast notwithstanding our margin question, And I took it Monday. We're having Ron, the CEO of Monday, come in a couple of hours, interview him. Like Monday sells to normal companies. Okay. And like, you know, and there was no impact at Monday. I mean, minimal impact. Right. And so it's— we have this— how do you think about— there's like this microcosm of SaaS startups that sold to B2B SaaS startups selling a fungible sales and marketing product that it felt like the world ended. Right. And then there's real-world companies where impacts were minimal. So is this— Is this a downturn or what did we go through? What did we actually just go through?

Well, I think you're picking two of the best, least affected companies.

Yeah, I could pick Mongo or Snowflake and a few others, but point taken.

Yeah, I, you know, what I can tell you is that my sort of view based on the casual empiricism of sitting in a lot of board meetings is that things like sucked for the past year, you know. And a lot, you know, because I think a lot of startups do sell not just to other startups, but to other big tech companies or the early adopter type buyers. And a lot of these companies were going through layoffs and so they were reducing the amount of seats they needed to buy.

Yeah.

So even, even the startups that were good at getting renewals were renewing at, you know, they were getting seat contraction as first.

It's still happening.

It's still happening. And that was a big change because For the last decade plus, seat expansions has been this huge wind at our backs. Now all of a sudden, seat expansion, you know, 120% has turned to 80% in terms of the expectation for the renewal. So that's been a big problem. The other thing I'm seeing is that there's a lot of categories that are merging right now. You know, like you look at like sales enablement, for example, we thought there were 5 or 6 different categories of, you know, sales enablement. They're all now trying to get into each other's business. And buyers are starting to sharpen their pencils and say, "Well, we just need one of these." And I think that's going to happen in a lot of software categories. So, the buyers are getting more discriminating. Everyone's looking to cut costs. And I think it's like a pretty tough period, actually. I mean, I describe it as a software recession. I don't, you know, I don't know why the rest of the economy has held up as well as it has. But from the point of view of your— if you're in the software business, we've been experiencing recession over the last year or two.

I've started to go into kind of an ass-kicking mode related to this, which is, look, this happened, right? So it was a tough year, but aren't we lapping that? Shouldn't everybody do like a little bit better the next year than they did the last year? Do you get an excuse to not at least do better than last year if you were heavily impacted?

Yeah, I mean, I think that the last, I'd say the last 5 quarters have just been, you know, have just been, Every board meeting is reforecasting down. I think, like I said, the last few weeks, it feels like things have started to turn up a little bit. If you're still reforecasting down 5 quarters from now, then I'd say you're screwed. The next year should be better. The old saying goes, it's escalator on the way up and elevator on the way down. We just had the elevator on the way down. Now, we're starting to build back up. It's not like it's going to bounce back. Back to just where it was in late 2021. It is just not.

It will take another 20 years, right?

It is like Bill Gurley describes this, a sawtooth pattern where things go up with little corrections and all of a sudden, there is a big correction that starts to go back up. We are sawtoothing our way back up, but it is just never going to be like it was in 2021. That was like the biggest bubble since the dot-com bubble in 1999.

It was because the smart people bought into it.

That's what always happens. Psychology is really powerful.

The smart— it went on too long that even the cynics, you have to play the game on the field. Do you want to sit out the game for 2 years when there were huge cash exits. It was— I mean, there were cash exits in 2000, 1999 too, right?

I mean, the ZIRP bubble, if you want to look at it that way, had been building for 15 years. It's a long time. People just started taking it for granted that interest rates will always be this low, that capital would always be this available, that valuations would always be this great, but it wasn't just us. Look what's going on in the commercial real estate sector. Are just getting their faces ripped off right now. You're going to see a lot of—

More to come.

Yeah, you're going to see a lot of Siri bankruptcies in the next 18 months.

Should we— I want to hit this one for fun, but related to this bankruptcy thing, and I know it's very visceral when you're on board meetings and all the other stuff, but should we really care if some of these overfunded unicorns fail? Does it really matter? There's so much on social media and the media. If it's all served, does it matter? Does it matter if 20 or 30% of the 1,100 unicorns go under? Is it such a tragedy?

Not to any of you guys if you're founding companies, who cares? It really only matters to the founders and employees and investors of those companies.

I don't mean to be callous to the employees.

Yeah, it matters a lot to them.

But at a meta level, right, the world hasn't ended or anything.

No, no, I mean, and, you know, look, I think that software's not going away. I mean, software's only gonna become a larger and larger part of the economy. There's no way, that it becomes a smaller part of the economy. The business environment is always changing. There's always these new platforms like AI. So if you're a founder who has a great idea for starting a company, no, it doesn't matter to you. I mean, start your company. It doesn't matter that some overfunded unicorn, like, you know, is, is basically, you know, a zombie.

Yeah. I mean, I don't mean to be— I shouldn't be— I didn't mean to be uncaring about employees that are impacted, but at all. But at a meta level, we take so many cues from VCs, right? And yeah, it's terrible. As a VC, it pretty much sucks if you've got 10 unicorns you got to ride. I'm sure it's not fun to work at Tiger or SoftBank today, but for the world, I just don't— I think it's overdone.

Yeah. Look, I mean, I founded Yammer in the wake of the 2008, you know, great financial crisis.

Didn't stop you.

It didn't stop me from— yeah, and it turned out— I mean, it was, by the way, it was really hard to raise money. I think we only had like one term sheet at the Series A and Series B.

Is that true?

Yeah.

Even as the CEO of PayPal, you got one term sheet?

Yeah. I mean, it was not easy, but we did it. And PayPal was mostly created after the dot-com crash. I mean, it was founded before, and thank goodness we raised a bunch of money before, but the company was built primarily in the wake of the dot-com, from 2000 to 2002. So I think building a company during downturns is a great time because, you know, the war for talent is less intense. So recruiting gets a lot easier. It was getting insanely hard to recruit anybody in 2021.

Yeah.

And startups couldn't really compete with big companies which were, you know, giving huge salaries to, you know, so that gets easier. Also, when you are operating during either a downturn or just a less frothy period, there's less competitors who get funded. You know, like in 2020 or 2021, as soon as you would come up with a great idea and start a company, there'd be like 5 copycats who would get funded. So I think it's generally— and if you look at the history of like great venture returns, it happens from vintages when, you know, you're not like obviously in a bubble. So this is a much healthier place for the ecosystem to be.

Yeah. Okay, this one. The burn multiple. So every investor update, I mean, I, I think you coined the term. If you didn't coin the term, we'll consider you the coinifier of the burn multiple. Every investor update I get this metric. I, I think, and I think of you every time, the burn multiple. And, uh, I want to— I agree with you on close to 100% of things on SaaS, but this one I want to challenge a little bit only because I think it may have taken on a life of its own beyond what you intended, right?

Right.

Which is, I see founders that are maybe burning a little too much, thinking their burn multiple is okay, as they're slowly driving their car off the cliff, right? They're slowly driving it, right? And so when you think about this today, what is all this? I know what you're trying to— we're trying to simplify a lot of things here. How do we think about burn multiple in 2023, 2024?

Yeah, I think I wrote, I wrote this blog post called The Burn Multiple. I think I wrote it in early 2020.

So early 2020.

Yeah, it's 3 and a half years ago, actually. It was— I think it was when we had— there was like a 3-month kind of COVID swoon period in the market.

Might have been 6 weeks, but we'll call it 3 months.

Yeah. I mean, basically everyone thought the world was ending because of COVID and then the Fed just started airdropping money. So it was a very short-lived— and that's when the bubble began. The super bubble began. But in any event, I wrote this there because I thought that it would become very important for startups to think about their capital efficiency, and they weren't, and now the message really matters. But in any event, in terms of— well, sorry, what's the question again? I'm losing track.

Well, how do we just now— I feel like today— so that window was an area where efficiency was incredibly important. Important, right? Yeah. Then we went through an area where it was only important as a game until the next round, right? Now we're in an interesting world where actually for the first time all the public SaaS companies are efficient. Monday went from -15% to like +20% non-GAAP operating margin in 15 months. Mongo just flipped 15 points. Salesforce is approaching the rule of 50. It's already— I mean, the level of efficiency in the public, it's jaw-dropping. They basically just froze hiring. It sort of worked.

Yeah.

But so we're in this new area of more efficient efficiency. So what is— what's the guidelines for founders today, right?

Okay, so, so let me make two points. So, uh, the first is why kind of come up with this new metric of burn multiple as opposed to using things like CAC or CAC payback, things like that? Yeah, I think it's important is that what I was seeing in metrics like CAC is that if the finance team simply misattributed a certain expense, then like it would make the CAC payback look great.

Everyone's got a great CAC.

Yeah, exactly. Every startup, it was way too easy. And I'm not saying they did it on purpose, but you know, you just ask the founders, well, is your entire marketing team, including the communications team, in CAC?

Yeah.

And they're like, no, I thought it was just salespeople. So there was— there's just too high a chance that CAC was— or magic number is even the worst version of this. Like, no one knows how to calculate it. It was constantly miscalculated. So the beauty of burn multiple is you just take your entire burn in a given quarter or year, and you divide by the net new ARR. So there's like nowhere for people to hide. It just captures everything, and it's a measure of efficiency. Now, the second point is that I created these rules of thumb to make it really easy for founders just to quickly diagnose whether— this is a good thing about the metric, right? Is like in like 30 seconds you could figure out if you're good or bad, every board meeting. But it is true that the standards for what is a good burn multiple change over time. So, and I say this in the blog, but I don't like quantify it. If you're a very early stage startup, like let's say pre-Series A, your burn multiple has to be bad because you're doing all this R&D and you're just starting sales. So your burn compared to your net new ARR, it's going to be a really high ratio. And that's funded. What's that?

If you're funded.

If you're funded, that's okay. But what should happen over time is that your burn multiple, which is just your burn divided by your net new ARR, it should be going down. And obviously, by the time—

I think that's the point that folks miss.

That's the point. It should be going down. And so, if you're a late-stage company or a growth-stage company, your burn multiple should probably be 1 or even less, meaning, let's say you add $20 million of ARR, net new ARR, in a year. You shouldn't probably be burning more than $20 million. Like, you know, and then by the time you get to be public, obviously you— ideally you'd be profitable or cash flow positive, in which case your burn is zero. And hopefully your net new ARR is a big number. So zero over, you know, a big number, it's, it's zero. So your burn multiple should be trending down towards zero over time. It can start at the seed round at a high place, by Series A, you know, it's okay to probably be at 2-ish, you know, growth round 1-ish, public company 0.

Yeah, right. It's a good—

we're—

this, this idea of how it trends maybe was in the post, but it's not in every investor update I get. I think where I see it get corrupted, if you're lucky enough to have raised funding, right, is as you cross $10 million, somewhere around that, a million a month, um, your burn can grow out of control, right? It can grow out of control the day after Demo Day at YC. But there's this moment in time, it's starting to click, right? You're hitting $10 million, you're growing 100%, 120%. You know, if you're growing triple digits at $10 million, you've got something good, right? And if you look at your burn multiple, and I'm like, well, it's 2.4. David said it was suspect, but I'm not in bad. But 2.4, when you're adding a million of new bookings, that means you're burning 2.5— I got my math right— you're burning over $2 million a month, right? And so it can— that, that can sneak up on you, go from $600,000 to $800,000 to $1 million. And that's where I see it, just when it gets good, your burn multiple can get bad, right? If you're not— that's where I think people misunderstand it, right?

Yeah. Well, also, if you— so what happens is that when a startup creates its forecast for the next year or the next quarter or whatever, if they want to scale up or hit a greater level of ARR, they typically have to invest. They hire a bunch of salespeople, they train them, there's ramp time, So you know what your costs are going to be, but your prediction— but your net new AR is basically a prediction. And if you miss, your burn multiple can go from like a forecast of 2 to like 5.

Just shocks founders all the time, doesn't it?

But that's a good reason to be looking at the metric is to like— it does jolt them when they see, wait a second, our burn multiple is horrible this quarter. What I said— what I said— I gave a couple of— I gave a few talks that are on to our portfolio companies that we later put on YouTube as we were going into this software recession in 2022. And what I said is, do not let your burn multiple go above 2 because we're going into a tough period. It's more likely that you're going to miss than exceed. And if you miss, your burn multiple is going to—

I think it's even worse than you've been planning.

Yeah. So 2 is the absolute max that your burn multiple should be going into this like tough period. Anything above 2, you're in the danger zone already.

Okay. That's a good summary. All right. One thing I want to make sure we hit, let's skip that for a minute.

Yeah.

A little bit of a plug, but you've had some success. Founded Yammer, founded a few other, movie producer, $3.5 billion under management, PayPal, others. So you're going to start another company?

We did.

You did?

So we're launching this today. We announced it today. I just tweeted it out. This was previously a free tool that we gave out to our portfolio companies first and then kind of published it. And the way— it's SaaS Grid and it's a dashboarding tool that's built specifically for SaaS startups. And the way it works is you just connect your data sources like Salesforce or HubSpot or QuickBooks or you could Excel, upload spreadsheets, and you just connect those data sources, and then we basically give you all the charts and dashboards you need and should be looking at if you're a SaaS company. There's something like 70 metrics that we just auto-calculate for you. Then there's a setup process where we've identified hundreds of edge cases where the data doesn't properly translate from HubSpot or Salesforce or QuickBooks or whatever. So we, you know, its implementation takes about 30 minutes, and then so we'll help you get it set up and then you can customize the dashboards. This will save, I think, SaaS startups a ton of time. There are other dashboarding or business intelligence tools out there, but none of them are custom-built for SaaS companies. So what happens is you have to hire like a data analytics team and then they're going to like take all of these data sources and put them in a data warehouse, you're going to have to clean them up, then they're going to have to write a bunch of formulas in SQL for all the SaaS metrics that you think you need, you're going to forget about half of them, and then finally you'll get your dashboard in like Looker or Tableau. This just like replaced all of that. It's a 30-minute process, connect your data sources, boom, you've got everything you need, and you can customize it from there. So I think the idea here is that by verticalizing a business intelligence tool for a particular industry, we can just give you a level of convenience and value that just wasn't possible with like a broad-based generic business intelligence tool. So that's what SAS Grid is. The history of it is this just started as a spreadsheet that we would give to companies that were applying for, basically, they wanted to raise money from Kraft. So we just gave them a spreadsheet saying fill this in, because they weren't giving us their metrics in the right format.

Got it.

So we're like, here's the right format. So we give them the spreadsheet, the spreadsheet would spit out the charts so they could see what they're giving us. They're like, whoa, this is really good. I wish we had this instead of just doing it ourselves. So then we basically put it out there as a free website that they could use. Then the aha moment was we started seeing SaaS companies using it as their dashboarding tool, meaning not just when they ran a financing process but We had 500 companies that were just using it as their dashboarding tool, and we're like, okay.

They applied where you could apply to Craft to get reviewed, and they would use the output as their screening, as their reporting tool.

Yes. But again, the aha was they were using it not just when they need to raise money.

No, every month.

But every month or for their board meetings, and we're like, okay, the world actually needs a dedicated SaaS dashboarding tool. The more we started thinking about that, the more excited we got. Look, I'm like a co-founder, but the real CEO founder is Ethan Ruby, who is our partner for analytics at Craft, and he's been in the weeds of taking all the data from startups and realizing where all the edge cases are and where all the formula errors are and where the data always gets screwed up, and he's been cleaning it up. So he's productized the work that he's been doing with hundreds of companies, And he and his brother actually are like the main founders. And now we're spinning this off into its completely separate company. And I think we can make this the standard for SaaS companies.

So I can go today, sasgrid.com. Not.ai. No. We'll come back to the AI piece later. I can do this. I can hook it up. I can hook up my CRM, my QuickBooks, and I can start getting these same data lakes that 500—

Totally. Pretty good deal, right? Yeah. And it's free. For any SaaS company, if you're under $1 million of ARR, it's totally free to use. We don't charge you till you hit $1 million of ARR. So I think you'll find that if you use this, it's going to simplify your lives a lot. Cool.

All right. I'd love to go for another 45 minutes, but let's thank David. This was really great. All right.

Awesome. Thanks, man.

Great.