This content was created by Jason M. Lemkin. This content was uploaded by Jason M. Lemkin. This is a YouTube video titled "Investment Strategies: Is Series A or Series B the Better Option? David Sacks + Jason Lemkin" containing a conversation recorded on February 29, 2024, between David Sacks and Jason M. Lemkin. They discuss investment strategies, focusing on the trade-offs between Seed, Series A, and Series B funding rounds, and the impact of market corrections on valuations.
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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, 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, it felt like the valuations would just, you know, hockey stick as soon as anything seems 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. And so I think it's okay to wait. Basically, just incrementally. Yeah.
If you can't, I mean, that's the paradox, all of it for founders. And you would wait if you could.
Right, right.
You know, when I started, the lesson I was taught is, from Seed to A, the valuation needs to at least double, but ideally triple. Not, not to be fancy or to look good on paper, but to justify the risk.
Yes.
Because if you have enough money and Craft has enough money, you might as well wait. Like, I'll pay 2x the price, right. For. For, for a tenth the risk. That's the biggest bargain in the world, right?
Yes, I think that's right. So if it's, if it's, if it is an 80% mortality rate from C to Series A, series A's need to be. What is that, five times?
The math just says, like, the math doesn't work. Right? It doesn't.
And I think there has been a correction. So 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 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 way to market my deal anymore. I better be, like, really conservative. 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.
Correct. Yeah, I don't. I think folks here may feel 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, for the habs. Right. For the, for the ones with the right resumes that, that came out of stripe or came out of yammer, came out of wherever they. There's no impact. Right. There's still a surplus of folks who in many case are gentle people, investors, and they don't care. Right. 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 you've done plenty of stuff in fintech in combination over your career. I still get confused when I meet with a founder with a 30% or 40% margin business. 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. The insight that made Bill Gates the richest man in the world is he realized he could mass produce software. So at a low cost. Right.
Because I don't know how he 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. Specifically, 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. And so the more of it you can sell, the more lucrative it is. I mean, that's the definition of gross margin.
