Investing and Venture Capital in 2023 | SaaStr CEO Jason Lemkin + Atrium Founder/CRO Pete Kazanjy

Well, so I think one of the other things that you spend a lot of time doing because like, everyone's familiar with Saster, but they might be maybe less familiar with Saster Fund and the fact that, you know, you're a full time investor, even though like a full time, like a full time investor plus a full time, like, you know, media company impresario here. So I guess that's like maybe two full times, which is probably not surprising, but maybe what you can do is kind of like, like, you know, share a little bit about how you started kind of like doing investing and, and like maybe what inspired the Saster fund and kind of how it's differentiated from kind of other folks out there.

Sure. I, I find a lot of this stuff boring, but I know people find it interesting, so I'll answer your question. Right. So. Yeah, well, just, there's just. I think founders should, an executive should learn a lot about how investing works. Right? There is. It's just. But my story. So. So, yeah. So after I left Adobe, one of my investors, a fund called Storm Ventures, asked me to join. I went there, I worked there for two years and it was a great opportunity to really learn to invest. And it went pretty well. So my first investment was Pipedrive that ended up selling for 1.5 billion. Yeah. My second one, was that a Vista pickup? Yeah, they bought it for cash. That was the first one. So I learned a lot from that. The second one was Algolia, which is doing hundreds of millions and is worth 3 billion today, which will go IPO when we come out of this search as a service API. The third one was Talk Desk, which is worth 10 billion today. The fourth one is what became Greenhouse, which is worth about over a billion dollars today. The fifth one was Salesloft, which, as you know, sold for well over $2 billion last year. Right. So I was kind of five for five in the beginning and had a few other pretty good ones too. I actually didn't. You didn't know back then that they would be so good, but those ended up on the aggregate being fairly insane outcomes. And then in 2016, I kind of struck out on my own for a variety of reasons. Got harder, but still done pretty darn well. And I tried to do three or four investments a year of like 1 to 4 million. The world's changed. It got harder during the boom right from late 2020 to early 2022 when everything got insane. So I kind of slowed down a bit and now I'm behind. I actually have too much money as do some I actually have. It's interesting for founders or founders to be actually probably have too much money to invest now and would love to do four great investments in the first half of next year if I can find them. It's a really interesting topic. May not be what you want to chat about of dry powder. There was a lot of talk about too much dry powder. Now people aren't talking about it anymore because VCs that do later stage stuff are just terrified. They're terrified. But there's a lot of for folks that have been around for a while like me, here's something for founders for folks that do seed up to late seed up to early a folks that have been doing this for I started investing in 2013 so anyone that's been doing it since 2015 or so, they're excited to invest now.

Folks that started are declined.

And so not even just that. It's just like, it's still pretty good. Like, like good, good companies today are still worth $5 billion. Like if you invest it at 10 million valuation and GitLab's worth 5 billion and Hashi Corps with 6 and Mongo's worth 8, you could still make money. So maybe not as much as last year, but so folks that have been doing seed for a while that have some hit, some had some returns, some hits, right? Yeah, maybe they're worth half of what they were last year, but. But we know how to do it. But folks have started investing more recently actually, no matter what they claim to their LPs, their portfolios may have like nose dived, right? Oh yeah. Def. But yeah, even with market adjustments, my current batch of companies is at 4.4x. So that's still good. You can still make money if you quintuple your investors money. That's why hunt out investors now that have been around for a while. Hunt out investors that aren't scared. If you're early stage, they'll invest. But late stage, oh my God. I've been stunned the last 30 days. How much worse and I just wrote about it on Sasser today how much worse late stage investing is. And this is why there's so many layoffs in the industry. It's not sometimes these companies are struggling, but for the most part CEOs are waking up to the fact that there's just no more money coming. That's the issue. That's what's layoffs. There's no more money coming.

Yeah, like what, what, what used to be like, okay, this is good for 24 months now. It's like, that actually might be enough for 36 months. It might be enough for 38 months. Yeah, it might be. It might. Right, so. So. Exactly. So, like, just, you know, rejigger tune your spreadsheet a little bit there and say, like, oh, okay, gosh, like, I guess we can't be that upside down right now.

We can't be that upside. And then, like. Yeah, and then I can go back to the point. But basically, what if you're wondering what happened in layoffs, like, what Stripe said is, like, was transparent and true. Basically, everyone doubled their hiring last year. Everyone doubled their hiring. And so best case, they're freezing hiring now because they don't need twice as many today. And capital was so cheap, and there was just so much capital that every. Every VP was like, well, they hit this crazy plan. I need 100 more reps. I need. I need $100 million marketing budget. I need a thousand CSMs. And, yeah, when capital seemed to be infinite, you just gave it to them. Right? You just gave it to them. But. But the thing is, people hired 50% more people than they needed last year. When I look at the. Go back at the headcounts of the later stage companies I've invested in, all of them doubled their headcount. Even some of the most conservative and lowest burn ones doubled their headcount last year, and they didn't. No one needed to. Like, let's be honest, no one really needed to double. You. You do need to grow your sales team to meet your plan and do. But you didn't need. We didn't really need to double our headcount. It was too fast. It wasn't just the money. It would have been fine if we raised all the money and left it in the bank. Right. But we didn't. Right. We just. We just doubled. We doubled the headcount. I think the problem is paid people a lot more. And we paid people a lot more. There's a lot of inflation, especially in sales.

Yeah, I think that, like, here's the thing. I think one of the things I've come to realize is, like, it's funny. Like, there's like, microeconomic actors, like, you know, people walking down the street making a decision as to whether or not they're like, you know, gonna buy a hot dog or not. And then there's like, macroeconomic actors like Jerome Powell or whatever, and then there's kind of like medium economic actors, just like startup founders and what have you. And I think the thing there is, like, everyone's Got a boss, right? And I talk with my investors about this a lot where you raise this money not to just have it sit in the bank because your investors, the deal there was to deploy that, to then turn it into ARR growth such that it could go to the next markup, such that it could impact their IRR, which is exactly what the LPs want and so on and so forth. I think you'd have to have had pretty strong intestinal fortitude to, to essentially make a trade like that and say, hey, hey, I'm going to raise a bunch of money in this, in these frothy times and I'm literally going to sit on it Warren Buffett style and then wait to deploy it later on.

Well, you're right.

I think, I think that was like pretty.

Some did, Some did it.

I mean, like high five to you, man. Like, God bless. But like those were probably pretty spicy board meetings while you were sitting there, like, you know, sitting on your cash.

Cash pile, you know, they weren't spicy. I mean, I've got one. I know that actually really accelerated in the back half of this year. That's sitting on 100 months of capital. When I just got got there, they're still burning almost nothing. Some did. And typically that happened when a company really didn't need a dollar and someone just offered to pay an insane price and the culture didn't change. I think your point though is, really, is really important. Which is part of the overhang is you're right is that at peak 2021, investors just told you to spend it all. Now as founders, it's your job to do the right thing. Like you. But. But literally the messages you got to say they're 180 degrees from today would be an understatement. Like, I don't know what's more than 180 from like it's like in the.

Upside down, inside out now.

And like no one really cares if you grow, if you don't, if as long as you don't need any more money. But the advice was horrific at the time that folks got last year. Like horrific advice was no matter how fast you were growing, it wasn't fast enough. Spend more. In all fairness, the public markets were reflective of that. The public markets only cared about growth. So VCs only did. But really many of the best VCs did not give that advice. I did not give that advice. I didn't tell anyone to spend any more money. I told people the opposite last year. I'm like, this is as Good as it will ever be in your lifetime. But yes, VCs are to blame for things today, but maybe not always for the knee jerk versions you hear on Twitter. It's that toxic advice. They have to be held responsible for that. Toxic advice to spend it all.

Yeah, but I mean, like, I'm not here to like, you know, be an apologist for venture investors because, like, you know, Lord knows they don't need it. But you know, their LPs were expecting the same sort of thing, right? And the same.

No, no, no, no, no, no. If you really want to get into the atomic piece, y fuel it. But LPs don't care whether you deploy, how much the company burns or anything, right? They just want strong, reliable returns. LPs are not really to blame for anything. The markup activity you described is the one thing where LPs were to blame. Historically in my investing career, LPs were always skeptical of markups. They always looked. And many funds historically in the old days didn't even do markups, right? And then markups became institutionalized and what happened? But LPs were always be like, whatever. I remember when I raised my first own fund back in 2016, the LPs literally didn't care about anything. Like it doesn't matter. I'm betting on the future, right? Markups don't matter. Companies go up and down. Companies raise at 100 or 200 and then fail. But then LPs last year all started to report it, as is top LPs last year reported had 90% average IRR. So they got drunk on this too, and they fueled it and they took this stuff seriously. But no, VCs do play to their own investors, but their own investors are one layer less in the weeds, right? They're less in the weeds.

Yeah. And so just kind of as we're kind of wrapping up on time here, Jason, it sounds like you're saying that you have a bunch of dry powder that you're sitting on and you're looking for. For to make, you know, generally you do three to four investments a year. One was that. What was three to four investments a year? One to four million. One to four million dollars. Maybe you can kind of share a little bit about like, you know how Saster fund is like differentiated from other kind of early stage kind of cc's.

I don't think I'm differentiated in any way, shape or form. The only thing that's differentiated is tell me what you really think is that you get me for better or worse, right? That's the only thing that's differentiated is me. I don't think that firms are differentiated that much. A little bit. Look, I mean, Saster is a decent brand even today, right? And that can help with recruiting. Like, people do like Saster, right? So it certainly does help to be, you know, look, having Sequoia or Excel on your cap table helps. And whether it should or shouldn't, having Saster certainly helps with recruiting executives. It is. It is a. It is a good indicator. And founders should seek that out, like, at the margin. Pick a brand, because each time you raise capital, you know, you only get so much for that. But do the best you can with that slice. But the honest answer is beyond a brand. You get me. And that's about it, right? And I have pros and cons, so you should. I only invest in founders that really, really want me. This is what I've learned over the years. And every, every, every month, I'll do a favor meeting. I'll get it. I'll get an email from another vc, be like, can you meet with the startup? And I'll be like, do they know Saster? And they'll be like, not really. And I'll be like, I really. And I'll do the meeting. And it just never works out, right? It never works out. All the. All the ones I've done have been from Saster super fans. And if you are a Saster super fan and you've read Saster and you think my honesty and direct approach and the ability to help you recruit is what you want, then email me, like, seek me out. If you don't think that I could add any value or maybe I had negative value, then do not seek me out. And that's cool. Venture is only so lucrative and it's only so interesting. And I would rather do fewer investments with founders that want me than be out there. And maybe to tie it together, Venture is sales, right? And there's different sales strategies, right? And mine is 100% inbound. I failed at outbound as CEO and I failed at Outbound as an investor. Every outbound deal I've done, either one failed and I gave up. And so I just wait and hopefully each year, three or four, a couple good founders, great founders, pick me. And that's all you really have to do in investing is like, all the meetings don't matter. Nothing matters other than that a couple great people pick you. And I will tell you that's where I'm different. And to finish the thread, if you're curious you can meet a thousand founders a year. You can meet one. The other ones don't matter. It's not a volume game. Tiger Global made it look like it. They had a good play. But really, the great ones, you know, in 20 minutes. In fact, you often know before you meet them. Not always, but often. Right? The way they communicate, the way they share data, the way they share metrics, the way they share their vision. Not all of them, but so many of the best ones are so crystal clear on how they're going to get there, why they're going to get there. Those are the ones that you want to invest in, and those are the ones you want to work for as a VP or a leader. You want to work for the ones with that vision and the ability to express where they're going in a way that makes your jaw drop. And if you're not seeing that from your boss, find another boss. Find another. Another CEO to go work for. Right.

I. I get that. We've had the benefit of having, like, Nick Mehta from Gainsight, Kyle Porter from Sales Loft, Manny Medina from Outreach, come do fireside chats and, like, yeah, the clarity of thinking and communication and kind of leadership is. Is. Is, you know, next level.

Sam.