Forget the SaaS Gloom and Doom. Just Build. with SaaStr CEO and Founder, Jason Lemkin
Jason Lemkin argues SaaS founders should keep building despite mixed market conditions. He points to winners like Canva and Klaviyo thriving while MongoDB and Salesforce struggle, and says AI is reshaping what investors fund and what customers buy. VCs now demand triple-digit growth rates, making fundraising harder but not impossible for companies with real competitive advantages.
Chapters
Where I see the biggest unforced error for SaaS companies say is when they fight this way. Now maybe I'll be proven wrong, but this is so much money, so much energy and I see so many of the smartest founders in SaaS saying AI is stupid. My competitors have these dumb hallucinations. It doesn't work. I don't need AI in my space. It doesn't make my product better. Maybe you're right in 2024, maybe. Maybe you are right. But you're going to lose that deal. Eight times out of 10 when you're competitor that looks a lot like you goes in and gets everyone excited about efficiency for AI. Thank you for coming out. So I was thinking about the last couple of years when we got together in Barcelona. It was interesting time in June of 2022 because everyone was still growing like a weed, but the little old stock market had fallen like 50% single out stocks. So it was a weird time. 2022 and the message in 2022 was like, no excuses, keep going. Sure, okay. Sorry you can't raise it. 27x ARR. Like Slack sold to Salesforce for 27 billion on a billion revenue. Sorry that era didn't last forever like a lot of VCs were hoping it did. But everything was still pretty Damn good in 2022. And then last year the message was, guys, it's just harder. It's just like 2017, 2018 into 2019 was. And then I'm thinking what's the message for this year? And I want to talk about it because I think there's just a lot of things going on. Some folks are actually doing great, which we will talk about in a min. There's a lot of doom and gloom on the social medias, on the Xs, on the Twitters, LinkedIn. So B2B that everyone's a Debbie Downer on LinkedIn. If that was the only way I got my information from LinkedIn, I think I would jump jump into the tames and call it a day. But it's actually much more nuanced. There are plenty of folks that are doing great, even private companies. Netscope, which is security leader, just put out a press release yesterday. They're growing over 30% at 500 million in revenue. 500 million in revenue. There's plenty of them. We're going to talk about that. Canva just said they're growing over 40% at 2.3 billion in revenue at their user conference the other day. It isn't to say things are hard. They're just all over the place. And so the best advice I think I can give you, having been doing SaaS for longer than I want to admit, is just build. Just build. When things literally when the world ended in 2008, 2009 actually wasn't even that bad for SaaS. We could talk about it during this event. Just keep building. When things crashed in 2016, it was only six months, but. But 2016, there was a panic and I wasn't even following the public markets. I'm embarrassed to say we got into 2016. The Saster annual was in February 2016. That week SaaS stocks fell 50% in one week. It was a crash. Everyone panicked. People said no one's going to buy software anymore. The panic lasted about six months. LinkedIn panicked and sold to Microsoft really cheap. 2025, 26 billion. But it was a profitable rocket ship with no need to sell. They were public, but everyone panicked. Everyone thought lasted about six months. Now this one's different. So when we're going into year three, so I'm going to talk about the different things going on, but if I had to summarize all of it, you cannot control everything. You cannot control public multiples, you cannot control a lot of stuff in the short term, but you can control whether you're more competitive or less competitive. You can put, you can be more customer centric, you can keep building and things will ebb and flow over time. We've been doing this as 15 years. I think it's a little longer. They will ebb and flow and if you keep your head in the game and you increase your competitive position, even if things are hard for you, they'll come back. So that's my best simplistic advice for these days is just build. I put this tweet together. I thought this kind of summarizes. What I wanted to chat about is three worlds that we're living in today. I don't know if B2B2C and B2B2B actually exist, but I'm going to use them going forward. B2B2C is folks selling to the real world, selling to the not, not to tech companies. They're doing pretty good. And we'll go through some examples. Canva was a great one, but there's plenty of others. The overall, I'm not exactly sure how the London economy is doing, but the US economy is close to record low unemployment. Okay, it's not perfect over across the pond, but it's pretty darn good. There are, there's wobbles and we did just convict an ex president. Not everything's normal or great, but pretty good in the real world. In the real world outside of tech, 2021 was the opposite. The real world was okay, but boy, people bought software like 11 times an hour in 2021. Like tech was overloaded. But B2B seems pretty good. B2B2B. I thought it would have bounced back by now. I thought what would have happened is, look, we've been through a cycle where a lot of companies just cut vendors. Maybe too much because it's a trite VC saying, but it's true. You can't cut your way to growth. Cutting does not produce growth. And people, companies go through moments where they have moments of panic, which I don't think is really happening in a lot of companies because they sell to end consumers or they just go through moments where there are zeitgeist, which is to rationalize vendors to cut vendors. And big public successful companies not in tech are just cutting their stack from 200 apps or 300 apps to 150 or I'll give some examples. And that makes sense. And people overbought. So when you overbought in 2020, late 2020 21, it makes sense for people to say this. Just way too many SaaS apps. Adam Gross was the interim CEO of Vimeo Public Company at over 400 million. He came to our SAST Miami. Then he said one of the things when I started Vimeo a couple months ago was like we had a hundred SaaS apps. I didn't even know why we had them. So even though he's a SaaS guy since inception, I'm going to cut, I'm here as CEO. He just brought in the full time CEO. I'm going to cut like 50 of these because no one can even explain to me why we bought these. So it makes sense. We did that. But I thought we would bounce off that process, we would get through it, we would stop cutting and we would get back to growth. I thought that and I think a lot of folks in impacted categories, I remember I did an interview, you can see it on YouTube maybe six months ago with Henry Schuck, one of the great founders, CEO of Zoom Info. And his point was, listen, we've got, we've bounced off the bottom, so we've got to go up from here. But we haven't seen that yet. It hasn't gotten better yet in a lot of B2B2B. I think it will. I can't predict. I can't predict. I Don't think any of us can predict well is why we have to build. And then there's this thing called AI. And I just wrote WTF? Because there's a lot of things going on in AI. It's terrific that we have 200x ARR rounds back. It's great. We'll talk a little bit about that and we'll talk more about it tomorrow. But it's warping a lot of things. We think and in some ways, 2021, the headlines, the funding rounds and everything feels 2021 done all over again. Just different for only for a subset. Only for a subset. This is my slice of world. It's not monolithic. And I put this together. I put a few leaders here on the left and then tweeting to others. Here's some folks that are not selling to other tech companies that are doing pretty well. Canva 40% of 2.3 billion. Pretty darn good. Profitable for years. Toast selling to restaurants growing 32% at 1.3 billion. ARR. I invested in a company that's adjacent to Toast called Owner, which is like marketing for restaurants. They're. They've crossed 20 million. They're growing almost 10% a month every month. It's a good company, but the point of the story is they haven't seen any macro impacts because their end customers are insane. There's some Sara great CEO and great team. We've had a lot of the team. The chief product officer did a great session at Sasser Annual on how they do five products, which is a great one to watch on YouTube. 39% at one point. One billionaire and that's the one in the middle or one of the look at the top. They're aggressively hiring. They're selling to truckers and fleets and consumers that are doing reasonably well. 39% of 1.1 billion. Klaviyo who will be here and talk about how they're going. If you haven't heard of Klaviyo, if you're in the e commerce world, it is the most beloved app. People love Klaviyo. It's coming up on a billion in revenue. The number one app in the Shopify ecosystem. Growth has come down a little bit, but 42% of 750 million and 30 some odd percent coming up on a billion. Those are end consumers. Monday is always interesting. A lot of folks probably don't use Monday because Monday. Monday does a lot. Has a lot of products. But we can think of it as an Asana or a Linear or Atlassian. For non tech customers. They started off we did a great session with the Cosio Iran at SAS Tranny last year they started selling to churches and folks like that. And I don't think churches are having a down year. I don't think they're having an up year. Maybe they're having a down year, maybe donations are down. But it's like the not the same variability that our friends at Zoom and Zoom Info and others have. So they're on the way to a billion in revenue. They're growing 34% and then the whole world of security if you're not in it, you don't get. In fact I'm not a security expert but it's evergreen. The threats keep going and CEOs have to keep putting budget. Zscaler said they're growing 32% at 2.2 billion and it's smaller competitors. We talked about private Netscope over 30% at 500 million. CrowdStrike and others. There are others. Wiz is seems to be the fastest growing software startup ever in today's markets. These are areas I call them vertical SaaS is less impacted. B2B2C security it's pretty good here. If you're not in a pretty good space you may be, you may, it may feel really hard but realize it's not everybody like it looks like on social media now. B2B had a rough week and when I was starting to put this think about this a couple of weeks ago, I didn't know but we'd have a week like this. This was a blood. If you don't follow the public markets and hopefully you don't as founders I would encourage you to put your money into vti, the broad stock market and just invest in your own stock and don't worry too much because it'll come up and down. But this last week was nuts. So Mongo down 23%. Mongo, one of the great, one of the great cloud stocks had consistently grown in the 30s or higher. Great CEO, great team. Everyone uses it, there's competitors but everyone use Mongo. Then just last week they said we're only going to grow 17% next year. Huge drop UiPath huge drop 30%. Lots of issues with UiPath which we love. Daniel Dyne spoke here last year. Excellent session. Just came back as CEO the other week. Growth is still good, but UiPath had no net new customers last quarter. No net new customers. Now. They did grow because they, they grew a lot of their accounts which is the way a lot of us are still growing. At scale, if we're not adding new logos, they're 5 million and up. Customers are at a record size. At UiPath, they're 1 million is growing. But know that net new customers. Think how different that is than Canva or Toast. Think how different it is. And then Salesforce, if you didn't follow it good, like you got other stuff, just go build. But Salesforce lost $50 billion in market cap. 50 billion. And what happened? They missed the quarter by a little bit. Who cares what Mark said? What the team said is we're only going to grow in the single digits next year. Only growing the single digits. And why is that bad? And I thought about a little bit one, obviously single digits is not great. It's not a growth stock. It's at the edge. But the real problem, and I don't think Wall street thinks about this, Wall street just reacted that the growth was in single digits. Salesforce has never grown slowly in its whole history. But if you think about it, Salesforce has gotten pretty enterprise. They have 115, 120% NRR. You're supposed to grow at least 15 to 20% if you have 15, 120% NRR. And so it's a sign that something's the least for the moment broken in the system. And what they talked about at Salesforce, what's happening, the deals that they projected are closing, they're longer sales cycles, blah blah, blah. It's harder out there, which we'll talk about. But also the deals are just smaller than they projected. Deals are contracting. And a lot of folks in tech blame deal contraction because of layoffs. It's not true. It's not true. There are far more hiring going on in tech even today than layoffs. So anyone that says, oh, we're contracting because all our customers are doing layoffs, it's an excuse. Even Salesforce says it's an excuse. It's not true. They're still hiring. It's just folks are managing their budget so tightly. They're saying we just will take less seats in Salesforce this year. Maybe our S and B team can just use Google sheets or I don't know what's going on. I don't know how you contract. But they're contracting their spend. They're contracting their spend. And so we're going to see some brutal nr, some brutal revenue retention because what I think this overblown budget scrutiny, but brutal week. But it ain't going to be like this every week. But it's a big one. But that contrast to the canvas and the others. It's super visceral. It's super visceral. This is a slide if I wanted to buck folks up. If you're in a tougher category, this is a slide that I saw the other day. I invested. I was the first investor in a company called Revenue Cat which automates mobile subscriptions on your phone. So about 30% of all mobile apps that have a paid subscription use Revenue Cat to manage it. And why that's interesting is that they have over 10,000 what they call B2B2C apps consumer though they call it consumer SaaS I call it B2C over 10,000. So it's pretty good slice 30% of this mobile ecosystem and what they saw because why this is interesting is because Consumer happens faster than B2B 2B takes time, right? Even Salesforce, it's multi year contracts. Everyone says how great ServiceNow is holding up, which it is ServiceNow 15XR 99% logo retention. They also signed three year contracts at ServiceNow. Even if things were tough at ServiceNow, it's gonna take a while to see it and then it would take a while to rebound in Consumer. You can cancel in 60 seconds on your phone. So what did they see? If you look 2021 was great and then 2022 sucked. 20 look how flat there was no growth. And then 2023 has been a rocket ship. Right. And I can tell you as an investor, the revenues track that too. No, no downturn. No downturn in this mobile economy. One of the early things I wrote on Saster, and I think it's still true, is that B2B lags B2C by about two years. It lags it by about two years. If 2023 was when everything rebounded on these fast cycles, maybe the simplistic way to look at it is 2025 has got to be when buy when it gets easier. For a lot of folks in classic B2B, that's the belief and I think this data at least suggests it. So that's my little sketch there. So I think we can believe that. But to be clear, I'm sorry to you a little bit. Here's a few other quotes. Just so you know, it's not you. Here's Yamini Rangan, CEO of HubSpot. This last quarter, both actually HubSpot and Salesforce saw a bump at the end of the fiscal year in January 31st. But it didn't last. Right. Even though HubSpot grew 23% of 2.5 billion weaker demand longer sales cycles. They're not, they're now having to do pilots at HubSpot which they didn't used to have to do. They're having to sell to CIOs and multiple stakeholders. So they've done well but it's not easier for them. And actually HubSpot's NRR has fallen to a hundred percent. So to grow 23% they had to add 23% net new customers. I might be slightly off on the number but it's, it's exact, almost exactly that. So in 2021 they had 110% NRR. It was like a record. You can watch the great session I did, I guess we did in 2022 after that. But we did it with Dharmesh and Brian, the co founders. They were at 110 but the drop from a hundred to 100 ten hundred is a lot of extra work. So they haven't seen it gotten any easier. Here's Zoom Info we talked about Henry. As it relates to NRR, our SB business is challenged. Zoom Info's tech NRR is about 85 now about 85 down from triple digits to 85%. Their non tech customers are I believe are still growing north of 20%. But these, the tech ones are just, they're all getting around the room or the Zoom and saying how can we buy less Zoom Info? Can, can Mark and Jason share a seat? Well Henry, find out what can we do. It's not that they're canceling Zoom Info but they're so aggressively cutting the spend that that it's hitting them. And, and then here we saw Mongo actually they lowered it even more down to 12% growth. They're modeling from 57% and this is consumption. We thought that your database, there's only so much you could do to manage the, the spend if you're growing. But again Mongo isn't seeing more logo churn there. Everyone's saying how can we optimize workloads? How can we use Mongo just less to save money. And we talked about Salesforce. I can't believe this will last. I can't believe large companies can spend their entire lifetimes trying to manage their workloads. Down on Mongo we have to grow. But there is no. I would have thought all of these folks would be seeing a bounce back. Instead I think the length of contracts and other things that actually mean we're finally seeing things tougher. That actually started maybe 18 months ago but they're only appearing in the public market data today. And this one was. This one was interesting to see, to be helpful. Not that it's like good news, but if you look at the analyst call, everyone was really on message. But Mark Benioff just went off. He spent about 30 minutes talking about how Salesforce is an AI company now, which it probably is, but it's not like it lifted their revenue. And he went on and on, and then he was actually very candid about their pipeline, which I thought was very interesting. He said, two years ago, 18 months ago, they needed 2x pipeline coverage. So for every dollar they wanted to close, they needed 2x in their pipe. It can vary for you. A lot of startups, actually, you're lucky if you have 5x. Like if 20% of your pipeline converts. If it's 25%, that's pretty best of breed. But to some extent it matters how you define pipeline, what you put in it, et cetera, et cetera. Salesforce has a good brand and I think they're pretty specific about what they manage. But it was 2x. Now it's 3x. It's 3x. Forget about the. All the other issues, the sales cycles and the deal compressions. They need to have 50% more pipe to hit the same number. If Salesforce does, you probably do too. But it's a way to understand for classic B2B. 2B what it's like out there. Went on and on about how they need 3x and it's harder on the sales team, harder on everyone. But it was, it was great to get that level of kind of transparency across this. And here's where AI confuses everything. Gartner, the other day, May 20, so this is less than two weeks ago, raised their estimate for the amount of SaaS spend this year. Raised it. Raised it. If you want. If you've been around for a while, you can make fun of Gartner a little bit, but you know what? Gartner is the only one out there that is surveying hundreds and hundreds of CIOs and buyers every quarter. No one else is really doing this. G2 and others that are great do a little bit of it. But Gartner's been doing it, I think, for over 130 years. They've been surveying CEOs, CIOs, every quarter and the changes and the pulse is pretty helpful and it was super interesting. It's a little hard to see in the, in this chart, but. And I'm also colorblind, so I don't know what colors these are, but what you can see Is the one on the right is them lifting the model for SAS that it's going to grow 20% to $675 billion this year. So we're adding 120 billion in spend in SaaS. And that's not infrastructure as they define it. There's some overlap. It's a little. It's a little niche which we talk about on the right, but pure SaaS spending 20%. Oh, sorry. To 247.2 billion on the right. So what's happening here? Right, it's pretty confusing. If we're adding 20%, where is this money going? Into some extent, it's not clear. Some of it's certainly endless price hikes, endless price increases. All people are still raising prices everywhere. Even yesterday, Spotify raised prices again for the. I think the third time in three years. So that's consuming some of it. But a lot of it is moving to versions of AI. And here I copied these from Gentleman Ball. You don't have to follow these details, but this is growth on the platform side. This is Azure and Google Cloud and aws, but look at how much acceleration the spend has been on Azure and Google Cloud. This is all AI. This is all AI. So they bottomed out a year ago or a year and a half ago. But this AI spend, this amount of money is fueling this here, right? Obviously we've heard of this little company, Nvidia, that's been around for a long time, that's had a good run up 40 billion in one day. I guess it balances out Salesforce. But there's so much money going here into this. The question is how, as a startup, how do you benefit from it? Salesforce itself isn't benefiting from it, even though it's building the applications. Dell actually got hit. Dell fell 15% last week. Dell said the. The good. We're seeing demand pick up, but also it's more expensive to provide servers for AI, so it's a wash for us. So it's a little murky who exactly is benefiting it. But one thing we know, VCs are all over it. So there's one thing that's crystal clear and I think, I think there's a session that we'll be doing on this tomorrow. I'm a little murky. I'll let you know later today. But I really call it the hunt for riches. And this needs its own session to dig into it. But if nothing else is happening, especially folks for fundraising, this is where VCs are deploying. It's one of the three places VCs are deploying money, they're deploying money into seed. Everything's great, we can chat about it for a minute. They're deploying money into their existing portfolio that are winners, even though maybe only 10 or 20% of their companies may be breaking out. They're flooding them with capital and they're doing what appears to some of us old timers as crazy deals for AI. 100x200x deals. And why. Why could Elon Musk for XAI raise at 18 billion with no revenue and a brand new product? That seems high. It's high for a seed round, isn't it? I think. I don't know anyone from Crunchbase or Carter here that got the data on seed rounds. Great things like scale. I have been $1 billion Excel putting an extra already the lead investor put in an extra billion dollars. Philippe will be here. He can tell us all about it and why. What's going on here. Obviously you can see the dollars at this term hyperscalers, but at the cloud leaders at Google Cloud and Azure especially justify it. But if OpenAI is really doing 2 billion in essence in 18 months, like that's the bet people want to make. This is how you make money in venture, is you try to get some. The one that's going to 2 billion in 18 or 24 months when there's a paradigm shift and you might lose on all the others. These are great. Do companies that seem epic, like Poolside, that are brand new and have essentially no revenue, are they worth 1.5 billion in 12 months? Maybe if you've got the ex cto of, of GitHub there, maybe. But it's a bet. It's like a super speculative bet. But what's happened? The one thing. Why does 2024 in AI feel like 2021? A little bit with all the unicorns? One thing to just. If I had to summarize all of what's happening in VC is everyone became a decacorn hunter in 2021. People used to be unicorn hunters. Kristoff's first investment was in Zendesk. What were they worth? 800 million when they IPO'd? Something like that? Yeah, 800. Now it's got to be 8 billion to get out of bed, right? It's just not enough. The funds got bigger seed rounds. What was the valuation at Zendesk in the seed round? 2 million. A bit less. A million something. If now the Zendesk would be 20 million, what's that? Series A was 3 okay, 3 million. Yeah. So great, you raise. So if it's 3 million then. And if it's 30 million for the A today or 50 million and everything's gone up 10x, the exits have to go up 10x too. Right. And funds are structured for this. Funds are looking for $10 billion exits. And it actually puts a lot of pressure on folks that are doing pretty good that just if you. If a V. The only way a VC can make money is not just if you exit for a billion, which is pretty hard. Pretty hard to exit for a billion. But it has to be 10 billion. Almost any VC is going to be looking at you say can you be worth $10 billion? So think about that lens. And right now in SAS, the problem. Let me see if I have this on the slide. I might have it for a longer one. I did. So sorry, I'll flip back. We may get into this tomorrow. How many? There are SaaS companies worth more than 10 billion? For sure. HubSpot's worth 30 billion. Atlassian, 40 billion maybe 30. They had a drop. There's plenty of them. Snowflake Datadog, so you can believe they're there in SaaS and related. But there's tons of really good ones that aren't worth 10 billion. Right. HashiCorp was the last IPO of the 2020 wave. IBM just bought them for 6 billion, which is insane. But it might not be enough for a big fund to make any money. Right. We've had two. I think I have a slide on here, but we've had two SaaS IPOs since 2021. Gladview, that's here. One of my all time favorite companies and CEOs. $6 billion market cap on 800 million in revenue. Rubrik, one of the best founders. $6 billion market cap on 500 something million in revenue. Rubrik was growing 50% at IPO. Klaviyo, 70%. Those companies aren't even worth 10 billion. And these sound like silly numbers as a founder. But you have to understand like that a lot of VCs might look are looking at those deals, the Klaviyo and Rubrik's and saying it's not enough for my $2 billion fund. That's not enough for your series B round at 100, you want 150 for your series B, great. But if I want to make 20 or need to make 20 or 30 or 40x on that investment to work like I need and Klaviyo and Rubric. Are you really, Are you sure you're better than Klaviyo and Rubric, it's producing stress. If the Klavius and Rubrik's, which I think should be 15x ARR or better companies, I think they should be worth north of 10 billion. If they're not, where do you hunt? Where do you hunt? As a vc, you hunt an AI, even though you might lose all your money. Even though people are going to lose so much money on these deals. The way funds are structured now, they're permanently, at least US style funds. I know there's smaller ones in Europe, but US style funds are permanently focused on $10 billion outcomes. Even I would argue Roger Ehrenberg, who founded one of the great early seed funds, IA Ventures, they did so many. They did almost 20% of the Trade Desk, which is worth 35 billion. Datadog and others. He just did this tweet response yesterday is any seed fund north of 60 billion has to find $10 billion exits, even a seed fund. And we can walk through some of that math tomorrow. But that's why you see these crazy. You're scratching like why are Sequoia and these guys are pretty smart at Andreesa's. Why are they doing these deals? No one's a dummy in venture. If you think someone's a dummy, they're not dummies, but they are making bets. And it's a hunt for riches in AI. The thing I would say to SaaS folks, and I pulled up this company, C3AI. If you haven't followed it, it's Tom Siebel's old company who founded the original CRM that Salesforce displays called Siebel. He went really early in AI. No one actually knows what this company does, but at least it's been AI since inception. It's down 45% this year. So being AI does not necessarily lead to riches. Salesforce being highly AI enabled doesn't do it. Dell doesn't do it. So my main point here to founders is there's two things about AI. One, you've got to have AI parity with the competition, which is worth chatting for a minute. You've got to or you're going to lose deals. But changing your TLD or your URL or adding the slide, you may trick an investor. Or two, don't give it a shot. But it's not enough. It's not enough to say you're an AI company today for a million reasons. It's not enough because everyone that needs to be an AI company should be becoming one. Everyone should be using APIs, everyone should be enhancing their product. But there is. There is. There's a hunt for riches, but people aren't stupid. It's got to be real. Whatever real AI is, it's got to be real AI. And if Marc Benioff can't convince Wall street he's an AI company now with all their investment, you likely are not going to be able to too. If it's not yourself. Okay, maybe just a couple of things I want to hit and if we have any time left, we could take some questions. This is a meta question that people are talking about but should be talking about even more. This is the mystery. This goes back to the gartner growth of 20%. It goes back. Where's this budget coming from? AI and people talk about there being experimentation budgets. I met when I was in London with a wildly smart and successful VC asking me how big CIOs AI budgets are. And every CIO I've asked for has no AI budget. There's no. No CEO went to their CIO and said, hey, here's a couple extra billion for AI. It's just not the way the enterprise works. But it's there. It's being repurposed. It's being repurposed. There is a company I invested in the post sales space that they have. One of their 10 largest customers is struggling. Struggling a bit. But public company. They went in and cut 30% of their post sales apps and bought one for a million dollars a year as their AI bet. But where'd the money come from? Cutting. They cut core apps. They cut 30 apps and brought in one to free up the budget. Right. And this was a little question from RBC Capital on Bloomberg. I would question this money on AI is coming at the expensive expansion of Salesforce. It may be. It may be cutting back the extra products they'd buy at Salesforce for AI. And Dell said the same thing. And here, Viva, Peter Gassner, one of the great SaaS. CEOs. Viva is a vertical SaaS company. Only raised about 3 million and is worth 35 billion today. Very specific. The biggest pharma and biotech companies run their businesses on Viva. He actually used to be the VP of engineering or CTO at Salesforce. Even he's saying it's a competing priority. Like they're putting off buying more and spending more with Viva to do to manage their drug discovery and manage their processes for AI. So this, the budgets are being mixed up and returned and two, just two things on it. This is what's happening. There is no magical AI line budget at big companies there is no magical thing. Stuff is being cut to fund these initiatives and why a little bit of it is fear that you've gotta be doing this. Right. The Companies have fear. CIOs have some fear, but some of it is huge efficiency promises. So I'll give you a quick example. I'm on the board of a company called Gorgis which is the largest contact center in E commerce and they've got about 16,000 Shopify customers coming up on 100 million revenue. And they're very SMB like their average deal size is 5k now used to be 3k. It's actually 5k because of AI chat about that. But they just closed their first 750k TCV deal. 250k year for three years. 750k, that's a lot going up market and where this money come from. Right. Turns out because of their AI they're going to lay off 400 folks in support. 400 folks. So let's 250k sounds like a lot of money. But it's a big company. It's 20k a month. If you lay off 400 folks in support and replace them with AI, can you free up 20k a month? Yeah. The human impacts here are a little bit brutal. I remember in the early days of E Signatures which was about efficiency, we went out to Comcast, one of our biggest customers and they took us to a floor which was huge. It was dark. They flipped on the lights and there are all these empty file cabinets that were replaced with Echo Sign, Adobe Sign and there are 80 people they didn't need. It wasn't 200. There are 80 people they didn't need filing their contracts for broadband Internet anymore. The money doesn't come out of nowhere. So there are some real human impacts to AI. Right? Positive in that I personally, I need a lot of AI people because I can't get anybody to do a lot of work. I can't anybody to like do our podcast or YouTube's like I need help myself. But vendors are promising huge efficiency gains. Are they working? There's are. We're already seeing yo yos. We're already seeing in the enterprise a lot of frustrated customers who are over promised by vendors that are coming back and saying their initial 1.0 deployments did not work expensive. We're seeing that all across the space. So I don't, I think everything, we all know everything's getting better. Let's not read too much into that. But it's here the related point that If I wanted to give some advice, I want to be crystal clear. And you can be a little bit. A lot of us in Core B2B can be a little cynical of AI, right? Is it really? Some. For some of our apps it won't make things any better, right? For some things it's minor. But what is clear to me is if your competitors are out there promoting efficiency gains from AI and you are not, and you do not have feature parity, you're going to lose this deal. You are going to lose this deal. People want and they. And I know they the initial promises in 2024 aren't being met. It's frustrating customers, but they know this is a bet they have to make and they do believe it's going to get better. Or at least they hope it's going to get better in 2025 and 2026. They see it and I where I see the biggest unforced error for SAS companies say is when they fight this wave. They fight this wave. Now maybe I'll be proven wrong, but this is so much money, so much energy and I see so many of the smartest founders in SaaS saying AI is stupid. Everything my competitors have these dumb hallucinations. It doesn't work. I don't need AI in my space. It doesn't make my product better. Maybe you're right. In 2024, maybe. Maybe you are right. I use Canva every day. I don't really use their AI stuff. I don't know if it's any good. I use Loom all the time. I don't know if it's really makes my Loom experience any better. I don't know. But you're going to lose that deal. Eight times out of ten when you're compare that looks a lot like you goes in and gets everyone excited about efficiency for AI. So don't do it. Do what you will, just build. But don't fight this. If you. If you're not a first, don't be a first. But I know I'm being a little redundant, but it's so important. Look at your top five competitors. Do a sheet. Be honest with yourself, your product and your co founders. What are they doing in AI today and what are they promising in the next 12 months? If even if it's a check the box feature, you better darn check it out. It's like going into a deal in the enterprise when you're not SOC2 compliant and they are or versions that if you've been in there, you're just going to lose the deal. There's a. I just don't trust you. I just need it. I don't care if you're better or more innovative. I need the SOC too. So I think everyone in the world should do that for no other reason. It's AI's become. You're just going to lose to the competition. This one we hit. But it's helpful to see it here. There's a few things that are just making everything also harder, which is that the public markets suck. They just suck on a bunch of levels. Multiples are low, but also we've only had two real IPOs and you look if they were junkie IPOs or struggling companies. One thing but only ones that bothered to IPO since Hashim 2020 were really good. Klaviyo and Rubrik two two. Everyone else is waiting. Stripe is waiting. Plaid is waiting. Canva certainly could have IPO'd earlier. Two and a half billion in revenue growing 40% they're waiting. People are waiting. But the ones that did have $6 billion market caps on their way to a billion in revenue with top tier growth, top tier nrr, top tier everything. This is just a drag on everything. It's a drag on every type of fundraising from Series A Later and it's just a drag. It's not going to last. This is a. I think Tomas Tungus just put out a good summary of the data yesterday. You can see it on LinkedIn or his blog. I think SAS IPOs are at a 10 or 15 or 20 year low or long low or tech IPOs. So it's not going to last. But it is tough out there. There is very little liquidity in the system and it's just. It is creating subtle stresses like the bar is just really high. If you really have to get to 600 million growing 50% to IPO. I know most of you are close, but it's. It's the most intimidating bar in my career. So it's just. It is. It is what it is. Maybe I blotted this one over, but the multiples are still men. I didn't. I've been talking about multiples much more the last three or four years at these events in Saster. But here's my simple way of thinking about you. This is the BVP cloud index. You can track it on Bessemer sites or other places. The medium public SaaS company is trading at 6x ARR the median now. Some are struggling, some are higher. The a lot of the best ones, the Samsaras and others are trading at 15. But this creates, this makes it really hard for people for VCs to make money. It makes it hard for a lot of things to happen in the system. And if I had to summarize all of this, a lot of old timers will say hey, this is just how it was in 2016 or 2015 or 2014 or 2017. May maybe this will. There's different ways to slice the data but I think it won't get easier for us until this is about 8x. Until we see 20 to 30% reflation in multiples. And it may sound like just a number, but it's not. It makes everything so much easier. These valuations work, the capital raising works, the investment works. 6x is just. You're here. The average folks that attends a Sasser event I think is around 5 million ARR, right? Work so hard, it took you 7 years, you're worth 30 million a con. It's not that great. It's a bummer. You want to be. The good news is you're going to keep building and growing and you're going to go from five and we'll see you at 10 the next year and then 20 and 40. But it's tough for the world that we got certainly got used to the last four years to operate well at 6x and so that's the one to look at when this reflates a little bit. And then is it really all interest rates? I'm no longer sure. Is it really all this? We're no longer sure. But six, six, it's. It's still a tough world. And maybe just two things to summarize. And again we, I think as a community we over talk about vc. But it, it is important at many levels if you're fundraising or just to understand the pulse of the system. Every VC that I know wants to Invest. There's new VCs that I've only been in a couple years. They've got capital. They don't care about the past. There's folks like Christoph and Mothers here who've got many winners so they still want to invest. I don't know any VC that doesn't have winners that doesn't want to invest today. So if folks are saying VCs don't want to invest, that's wrong. Folks that have only lost or got fired last week, they don't really want to invest. But everyone that's been around is looking. They're always hunting for winners. But there is real stress in the system. I picked three recent examples. The one on the left shows rolling IRRs rates of returns for VCs and it the way VCs calculate return is different than than others. But what you can see is like in 2021, like VC returns went crazy. Right? What is this 80%? And this is why everyone raised like three funds that year. It was not actually. The real problem is that even LPs, the folks that give VC monies thought this was sustainable. 80% returns are not. What is it? Who. Who can tell me what 80% compounded over 20 years is? It's like a lot, isn't it? It's like infinity or something like that. I don't know what it is. But it's crashed, right? And so I real irrs everyone is full of shit in venture on Twitter. Oh, all my investments are so great. I'm such a genius. I own 0.0001% of this unicorn. I made so much money. But the real irs, when you blend it all together, they're negative. So this is just stress. And VCs are getting a little bit of a pass from their own investors, limited partners who are saying look, we're going to give you a mulligan in some cases on one fund. But it's just stress. It is stress. It is stress a little bit on early stage funds, but it's huge stress on growth funds, which did lots of unicorns, hundreds of unicorns. And it's going to take them a decade to figure out what to do with fallen unicorns. It's a decade. And here's just two other examples on the right. What we're seeing stresses Squarespace. I don't know if you guys use. We use Squarespace at Saster for a lot of our sites. We use all these products. They're going private in a $7 billion transaction. Sounds great, 7 billion. But I think they're at 1.3, 1.4 billion, growing 20 something percent a month. It's a. And that's a premium to where they were trading. They're trading at like 4x, maybe even less net of cash. So why go like everyone we're talking about going IPO to get liquidity to do M and A to why. Why go private? It is a sign of stress in the system. It's a sign that the public markets are not working for Squarespace for a variety of reasons. There's a whole bunch of things. There's the low multiples we talked about. There's also such insane pressure on public companies to be very profitable today. It's too much. Salesforce is pushing toward 40% margins. Everyone needs to be above 30. It sounds great, it makes Wall street happy. But where are you going to invest if you can't hire anybody? So I actually have a lot of public SaaS companies are in a quiet decay state because they're not hiring anybody new. There's too much efficiency. And so what do you do? One option is to go private. Give me three or four years to just invest. Instead of having to do 30%, 30 cents of out of every dollar go to profits. I'll drop that to 10 cents or zero, grow faster, and then go public at 2 billion or 3 billion. That's the decision they're making, especially because the founder of Squarespace has been there since day one and actually he had an insane incentive package. When they went ipo, it was almost like Elon Musk. If you read it, there's a Saster post on it. If you look at the first one, he had these tiered grants. Elon had it and I think if he grew it to 20 or 30 billion, he like doubled or tripled his equity stake. So to, to give that up and go private, it's a big give up that, that there's stress in the system. And then this one, boy, this one's a tough one. A whole bunch of cloud leaders also before Squarespace have gone private. Avalara, Pluralsight Zendesk went public for 10 billion. I don't know all the details of all the deals, but a lot of them were fueled with cheap debt that now has to be refinanced at much higher prices. If you, if you bought a company for 3 or 4 billion as a private equity firm, but you really only put in 20%, so maybe you put in 800 million or a billion. You borrowed 3 or 4 billion at 2% and now you have to refinance it at 8. The problem is a lot of these SaaS companies don't generate enough. They're profitable, but they don't generate enough necessarily to service the debt. So this one was a shocker, even though it didn't get a ton of news. This, is this a canary in the coal miner? I don't know. Vista, which is One of the two or three biggest folks that buy SaaS companies, Vista, Tomo Bravo, a few others. They bought Pluralsight. They're writing the entire 3.5 billion investment to zero entire investment. I don't know what Pluralsight's doing today, but we wrote them up on SAS, I think when they were last doing public, they were doing 250 million or so and they claimed they had 27% profit margin. So they're generating 40, 50 million, 60 million of cash a year. But whatever happened here, it wasn't enough. So they're walking away from $3.5 billion investment. I don't know how big this fund is, but I know it's sub 20. That's a lot to lose if a lot of these deals don't work out. I was chatting earlier this week in London with someone that works at a Vista competitor or similar and he was just saying it's just so stressful. It's so stressful there because they don't. They bought all these companies that are good but between the cost of servicing the debt and the revenue slowing down, this is stressful for a bunch of reasons. These firms are not engineered to lose, to have multiple losses like this. Seed funds can lose 40% of their 60. Even half of a seed fund's deals can make no money. Doesn't usually end up being half the money because your winners concentrate your money. But a seed fund can write off half your investments. The PE guys can't write off half their investments. There's just, there's no returns. And, and this is stressful in general but. And I'll wrap up on this point if we're done with time. This is one of the. This has been one of the great liquidity outcomes options. You don't have to always IPO and you don't have to worry if Adobe can't acquire Figma or other issues. You don't have to worry if Google won't buy you if PE was there. And p All of my billion dollar exits as an investor have come to PE firms. A lot of them from Vista. Thank you. Another one of my early investments got acquired for 300 million a few weeks ago. Buy a PE firm. They worked for years. The growth great company at 30 million growth was good but not great. But got bought for 300 million 10x by PE firms. If this stops working and it started working around 20, 20, 12, 20, it's just more stress, there's fewer exits. It's tougher on us. Everyone wants to deploy money. Vista just raised another 20 billion. Like it's there but just understand that there's stress across the system and sorry I went a little long so I'm just going to summarize these last ones. This one is a just. It's just direct. I just put this up on Sasser this week. But emergence put together a bunch of data emergence. They were M investor and they invested in a ton of the early SaaS leaders from Viva to Bill to Yammer and others. They actually went to I think 20 or 30 seed VCs and got data from over 600 SaaS startups that were venture backed. So this is not normal. These are folks that about 20 really good VCs initialized cowboys and others all gave all of their data anonymized. So these are good ones. Yet they redid the data for me and the question is like how many of them are fundable? This is just one last takeaway here. It's tough and so I asked them to redo it by top decile and so there's a lot of data here and you can look at the slides later and we may be over but if you squint a little bit, this is the top. This is the top 10% of this top 10% of all venture backed startups by top tier seed funds. Top 10% venture backed by top. How are they growing in today's macro market? Less than 1 million 120, 30% a year. So try to do 120 30% a year. But to be more specific for later rounds from the 1 to 5, 166% 5 to 20 the best ones are still doubling and after 20 only 42%. So this is top decile. So if we go back and we will talk if we, if we have this session tomorrow, we'll talk more about it. VCs still need triple, triple, double to make money. They need you to triple and triple. After 1 million in revenue and double. It's okay if there's bumps, but that's what it needs to be to IPO in less than a decade and so roughly you got to be doing 166 or 200% in this first group. 100% in 5 to 20 and probably closer to 60% in the growth stage to be fundable. So looking at this I would say maybe 10 to 15% because this is the top decile. This is just enough to raise money. This is just enough to meet the venture bar. Be wary because if you have raised it, seed round is almost as easy to raise as ever. I'm not saying it's easy, but there's so many seed investors and so many folks want to do it. Realize your next round is almost certainly going to be much harder than you thought. If the only the top decile of the top seed funded ones are at triple, double, double, the bar is really high and all These and so just assume the next round isn't coming and if you don't know ask your investors honestly don't make push put them on the spot. Ask them am I fundable? Because this is probably the toughest level in my career. Top 10, 10 to 15% that already have venture backed are in a position today to raise another round. Now I will say not. I don't want to be too glim. Almost every founder I know has gone through periods when they were unfundable. I had is my five years My last company for was acquired by Adobe. I think three of the years we weren't fundable I raised the years we were fundable and then I went profitable because I didn't want to deal with the stress. I don't most startups are not fundable every year for a lot of reasons. But be very cognizant if you are. Don't waste energy, don't waste drama, don't overspend your cash. If you're simply not in this top deck seller better because it's almost certainly not going to happen. It doesn't matter how likable you are. It doesn't matter how pretty your deck is. It doesn't matter how many people you meet for coffee. This is the bar and it's harder to meet now than it has been. That's sort of. Let me Summarize just build B2 B2C did come back fast. That's why I'm not like a good better But I'm cautiously optimistic on 2025 I'm cautiously optimistic that if B2B2C came back two years ago 2025 people are going to stop cutting everything and spend more IPO and liquidity sucks this a lot. Losing 3 1/2 billion on Pluralsight sucks to IPO you have to be over 50% growth at 5 million IPO sucks but some really good ones coming Canvas stripe figment. I think people are going to get excited people are going to get greedy again which we need the final disappointed but there's stuff multiples are ma. The fundraising is hard. A lot of this stuff you cannot control. Keep building. It takes 10 years to get anywhere good in SAS. Seven to 10 years. Keep building. Be cognizant of the competition, be better to the competition and you get multiple chances at this. The pendulum swings back and forth. You can have a Everyone has a year of hell. It will come back and for the most, for many of us we just have to push through some macro challenges. We can't do anything about. So thanks, everybody. Thank you.
