"SaaS in 2024" with David Sacks @craft_ventures + Jason Lemkin | SaaStr Annual

Please welcome to the stage amelia abarra, gm and svp at saster and jason lemkin, founder and CEO at saastr. Hello.

Anybody having fun?

Everyone vibing? All right, welcome to Saster Annual. Whether this is your 10th one or your first, we just wanted to help get you a little quick start on the day, what to expect for the next three days. There's zip lines, there's brain dates, there's like a lot going on. So we just wanted to help you guys get a lay of the land so you can make the most out of attending Saster Annual 2023. So real quick, before we get into it, whose is it? Is that their first Saster show of hands? Oh, we got a lot of new. Welcome to saastr and who's a returning attendee? Fun. Well, welcome back and welcome home. There's a lot to see at Saaster this year, so we will be your field guide experts for the day. There are two hangars. You've probably already been in them, talked to some of our really lovely sponsors. There's campus maps if you need them. But the hangars are right behind you. So there are hangars west and east. They are literally the center of everything. So if you're looking for food activations, happy hours, it is all in those two hangars right back there. The food and wine fest tonight is going to be back there in those two sponsor halls.

Okay, when does that start? Yeah, when does the food and wine festival start?

When does it start?

What time?

It starts at five.

Five?

Yeah.

Okay, five. Okay. And there'll be Napa style wines.

Napa style wines. We're going to do like Napa style bar bites.

Okay, Sounds good. Okay, good. Okay, so that's five o' clock here in the hangars on site. Right?

Five o' clock here in the hangar.

Okay. Yes, got it.

Yes.

And keep going.

What's that?

Keep going.

Okay, I know a lot of you already have, like lunch and stuff. Lunches will all be back there. As you guys have already noticed. Coffee's back there. Anything you need is pretty much in those two hangers. So if you're looking for it, check there first.

Okay. And in the back of that one, the hangar east.

Yes.

If you haven't seen it, there is power in the co working space.

There is power in the co working space.

There is power if you need to charge. But like, only half the desks have power. Right? So look underneath the ones. They all have plugs, but only the ones that are close to the bed. But half of them do have power.

They do have power. Yeah. So if you need to charge up, that's a good place to do it. I know some sponsors also have like those portable batteries if you need some.

Okay.

Yep. Good place to power up brain dates. I know some of you have already done some morning brain dates. Those are in the blue building over there with a big banner on it. Braindates are such a great way to network. We'll talk about it a little bit more. But we highly recommend doing a brain date. Joining one, hosting one. It's like the best thing you could do at Zaster.

Okay.

And you'll get to it. But if you some folks spend the entire Saaster Annual and Saster Europa just in. Brain dates, meaning people. One on ones, one on twos, one on fours. Correct. You can sign up in the mobile app, but if you haven't, you can just walk there. And they will help you sign up, right?

They will help you sign up. Yeah. Just walk into those doors, look for the brain date lounge team. They will help you book a brain date.

Okay, good.

Yes. New this year for all my new folks. It's not new to you, but just new for everyone. This year we do have a founders and VC only lounges. So right past those big buildings, you'll see our founders lounge, you'll see our VC lounges. If you're a founder or a vc, it is gated.

Yes.

Yeah. So they will check your badge and if you're one of those folks, they will let you in.

Yeah, some folks. Obviously you're going to meet a lot of people when you're here, but a bunch of folks said, I want an area where I can just meet other founders. So on the other side of the east Container, there's a founders lounge that sponsored.

Yeah.

And so the brain dates are great, but if you just want to chill and meet other founders, pop in there.

Yeah, pop in there. New this year, also in the afternoon, we've got our Saster Royale. So if you want to try gambling, there's no money involved.

No money. There's Sasterbucks.

They're Sasterbucks only. Sasterbucks and bragging rights. And then last but not least, you guys have probably seen our lovely Container Park. That's where you can in fact ride the zipline. Okay. I know a lot of folks. It's a little confusing because we have so many sessions. So we put it all into the Saster Events app for you. If you haven't downloaded it yet, please do. It's just called Saster Events on either, you know, itunes or Android. It really helps you check in. You can book a brain date on it. You can also start chatting on it. So you guys have probably seen our QR codes kind of like splayed throughout the entire campus. Just download the app, scan that QR code, and you can start chatting. Super handy. So yeah, if you're wondering what these crazy QR codes are, these are accessible.

I'm wondering.

You're wondering. They're everywhere.

They seem to be everywhere this year. What are they?

Yeah, they're everywhere. They are powered by new Expensify. The lovely folks at Expensify helped us make a chat app for Saster annual. I know a lot of folks kept asking us how can I chat and communicate with other attendees while I'm here outside of brain dates. So you can do that in the Saster annual chat. So there's two types of rooms. There's kind of like general rooms, like social and announce. So if you join those, there's already a lot of you in there chiming in of where have you like flown in from, who you've talked to this morning. So you can go into those and then you'll see them right before each session as well. So if you go into each session's QR code, you can actually chat with the speakers. So highly recommend that you do this session. So be on the lookout for those. And then tomorrow, if you guys keep your lunch receipt and you join the app, Expensify will literally give you $20. So keep your lunch receipt, cash, a $20 bill, $20, they'll give it back to you. Yeah, okay.

That's pretty good.

It's a pretty good deal for like, for minimal work. Okay. If you have not yet, please do sign up for a brain date. We've done these I don't know how many years in a row now. A few. A few. These are our one on one and group mentoring sessions. So how this really works is again, go talk to those lovely folks in the hangar. They'll help you get set up. You walk up to them, you can join a brain date. There's a lot of really great topics in there. Everything from AI to PLG to marketing to sales. Lots of really great folks hosting and joining Braindate. So good way to do it, especially in the mornings. I highly recommend doing the morning ones kind of before the content gets too full throughout the day. Really helpful to join those morning brain dates. Okay, today we talked about it a little bit. But today stick around for the brain.

Dates because they started early today at 10. If people come early tomorrow, what time did the brain date start?

They start at 9am tomorrow.

Okay. So if you're not. Some of us are early birds. Yeah. Hello, Jacob. If you come at nine, is there stage content or just brain dates?

There's just brain dates in the morning.

Okay. But it's a mellow time. If you want to meet some folks, want to meet the maximum number of people possible. So come at 8:45 and do some brain dates.

At 9.

We'll be open. There'll be coffee, there'll be breakfast. Yeah.

Okay.

Come for a brain date.

Okay.

Okay. Today. Yeah. Today's big evening activities. We've got happy hour starting at 3:30 in the hangars, followed by the first ever Saster wine and food fest.

Okay. Yes.

It'll be fun. And then tomorrow. I know this is the moment everyone's been waiting for. Or maybe just me. Cheat codes will be playing rich. Right here on.

Right here on stage.

Right here on stage.

Okay. Will it be loud?

It will be a little loud.

Okay. It'll be a little loud.

It's gonna be a party. Okay, let's be clear.

Okay. Sounds good.

It will be a party. If you guys haven't heard of them yet, load up their Spotify or their YouTube on Spotify.

How many plays do they have on Spotify?

It says 6 billion.

6, 6 billion plays on Spotify for chico.

That's a lot though. So it might have gone up a little.

Sorry.

Yes.

Okay.

We'll have a really great opener tomorrow. Don't miss it. I know a lot of people come to the big party. We kind of clear the room out, we turn it into a party. It's a really fun time. So. Yeah. Hope to see you.

Is it okay to dress as one of these cheat codes or you think or how do you come out of a little bit? You can pick one of these. One of these? Yeah.

Bring your best fit to the big party.

Okay. I'm going frosting tonight.

It's a good plan. Friday to close everything out. Stick around. We will have a beer garden out in our container bar. Also the first beer garden. That's Astor. Everything's new.

And we'll do our. When does our final AMA start?

Your final AMA is, I think at 3: o'. Clock.

Yeah, 3: o'.

Clock.

Okay. So for folks that want. We have it. We do. I lead it to the extent I can be helpful, but we do it. We do like a two hour final ama. Grab a beer from the Container Park. You can eat out Here. And we will answer any last questions until we collapse or they kick us out.

Yes, exactly. Cool. All right, A few pro tips, if this is your again, maybe first Saster.

Okay.

Okay. There is a bit of a scavenger hunt going on, so I did not know this. Yeah. For things like cold brew, coffee, ice cream, popsicles.

I see.

Yeah. A lot of our popcorn. A lot of our sponsors have specialty foods and items going on at their booths. I've seen, like, on demand swag items.

Yeah.

I've seen games out there. Headshots.

Yes.

A lot of things out there.

A lot of activations.

A lot of activations.

A lot of activations.

Yeah. So go visit all of them. If you're looking for some of those specialty food items, sponsors have them.

Yeah.

Okay.

We also this year have a not so secret speakeasy. So if you were here last year, we moved it. Fun fact. So it is in a different place. So it is still a secret, but if you do find it, kudos to you. It's sponsored by our friends at Vonage. There's, like, secret snacks in there. There's, like, other things in there.

Got it. There's slushies, there's cocktails.

Slushies. Yeah.

Classic speakeasy stuff, right?

Alcoholic slushies. There's also other things in there.

That's good.

We did. You know, it is three days, so definitely pace yourselves. I know everyone got really dressed up for disaster. All of you are excited at like 7am to come into the gates. Like it's the Disneyland or the ERAS tour, which we're loving. But definitely pace yourself. I know it's a long three days. It's a lot of walking. So there are shuttles you can take. There's the pedicabs you can take. They'll help get you around the campus.

Okay. And just those pedicabs and shuttles, you can just hail one if you want to.

You can just hail one. Yeah.

They'll take you anywhere on the campus. Or if you want, you can just sit on them and relax and just take a loop, right?

Yeah, you can just take a loop. Yeah.

Okay. Don't be shy. Grab any of them.

They're there for you guys.

Okay.

Like we said, coffee's all throughout the campus. I know. Sometimes people tweet us and ask us where the coffee is. It's literally everywhere. There's some at the back of this stage. There's some at the back of the next stage in the expo. There's some out in the midway. So, yeah, there's Coffee. Literally everywhere if you're looking for coffee.

Okay.

Lunches, as you guys have noticed, are in the cantinas. And then. Yeah, like I said, don't miss out on the big party if you have not yet. Our wonderful registration team gave you the Swazterbucks.

Yep.

You can redeem them in the swag store. So in this big building right behind you guys is the Saster swag store. Take your Saster bucks there. You can spend them. There's some really fun, like, limited edition swag in there. So if you're wondering where people got the Saster swag, that's where.

What if you want more Sasters, you want even more of Saster bucks. How do you get them?

Great, great question. So glad you asked.

Oh, you have a slide on that.

It's on you. Yeah. So you can earn more Saster bucks at the casino.

Oh, at the casino over there. Just. Just in that. In the outdoor area to the right of the hanger east at the casino, you can earn more Saster bucks.

More Saster bucks. If you really wanted, like, more than.

One item or some folks want to take, like, six T shirts home for their family and kids that go to the casino.

Go to the casino.

Okay. It's the only casino where you only win. That's a good casino.

There's no downside.

Yeah.

Okay.

All right, everyone, so thank you so much for joining us. Anything you want to add for anyone returning disaster?

You know, I. You know, maybe slightly related to this, we have. And some folks, we. There's so much going on here, and we have. Amelia does her best to get the communications, but one thing that is, that has helped a lot of folks is we have a meet as a VC program. And if you didn't see it, it's too late to sign up on site. You have to do it ahead of time. But there's a form. You fill out your deck and your ARR and all this kind of stuff, and the VCs in turn. And we do some lightweight matching. And I think we had close to 200 founders that opted in about 200 VCs, and it's pretty good. And there's other ways to meet investors here, but for folks that are here, we. Once we recover from this event, we're going to continue this year round now. So anyone that is here, that is a founder can opt into this program monthly, year round to look for emails for us. And if you want to, if you especially, you know, have a great month in October, November, hit a big milestone, add AI as your new TLD or something, opt into the Me to VC program.

We're going to.

Instead of running it before each event for anyone that comes to annual or SAS Europa in London in June, we will run it year round. So experiment. But I think we'll get a lot more engagement. And we have, honestly, we have more VCs. I mean, VCs are picky. It's not like everyone's going to get funded. But we have more VCs that want to meet founders and get meet them through the program. So look for your email and if you didn't sign up for it, there is a Meet a VC link on the sastranial website. Is it hidden or is it there?

Meet a VC meet.

Okay, write this down. Meet of VC.com and as long as you have a ticket to this annual or the next one, you can participate.

Yeah.

And we will get this. We've done this for seven years, but we're going to productize it. So to. To do more matchmaking going forward. That was my main ad.

We made it super easy.

Okay, cool. All right, so we're gonna take like a three minute break and then bring David Sacks out for encore appearance.

Absolutely.

Today's a lot of the legends of Saster, right? A lot of. A lot of folks favorites. We got Monday Khan, we got Sumo of Data Dog back, David back R be right.

So that's good.

Good. All right, we'll be back with David in just a minute. Thanks, everybody.

Thanks, everyone. Enjoy. SA.

As the name craft suggests, we think that venture is a craft business. It's kind of artisanal. It's just us working with founders. The talent are the entrepreneurs. Once you know that the there's a market there, you need to basically go all out to win it. Question is, what's that one feature, that one critical feature that's gonna kind of launch you? One of the common denominators of the whole PayPal mafia is just how like phenomenally determined everybody was to make that company a success. When we sold Yammer Back in 2012, 2 billion was what success looked like. There's surprisingly few VCs who actually have had that experience building companies. As the CEO, there's been a regime change, rethink how to get efficient about everything. So when we come out of this period and we start having tailwinds again, then you pour on the gas. Technology doesn't stop developing. There'll always be new things that are very hard for us to imagine. Today I want to work with the founders who Feel compelled to do it.

Please welcome to the stage David Sacks, founder and general partner at Kraft Ventures, and Jason Lemkin, founder and CEO at Saastr.

All right, can you guys hear us?

Okay? All good. David, thank you for coming back to Saasture. Really appreciate it.

Great to be here.

We have been doing these for nine years.

Amazing.

You were kind enough to come out of the blue to the first one, not knowing what Saster Annual was. So it is good to have you back.

Yeah.

Well, good a lot. First of all, guys, we will try to. There's a lot I want to get through with David, but we'll try to save a few minutes for questions at the end. So think of one or two. But I bet we'll. We'll use up most of our time 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 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 CRAFT perspective. So, I mean, crafts. Craft's a big fund now. What's your assets under management? A billion and a half dollars.

We're at 3.3 billion. Yeah.

That was fast.

Yeah.

Is that a record over 3 billion?

I don't know. 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. And it's. CRAFT is still very SA B2B focused.

Right.

Majority B2B. How much of this convo is about AI? Is it all AI? Does it have to be AI first?

It's. It's about 80%.

80%?

Yeah.

Okay. And if I wanted to stuff.

What's that for New stuff, Obviously, we have a large portfolio of founders we need to keep servicing, and most of that is not AI. It was pre AI.

Right.

But 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 to craft?

Yeah, absolutely. That's the other thing.

I'm not being facetious.

No, no, no. It's the, 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 SAS 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 reels. 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 three 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 is going to be owned by the big tech companies and those mainly are plays for a good M and a exit. Yeah, second bucket is copilots and I think this is the area where actually startups, new 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 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. It 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 auto completes everything. Our portfolio company ClickUp just released some Similar functionality. I think that, you know, apps like Gong or course, 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. Craps 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 Demoare. Right. So it's an interesting mismatch where unicorns have been reborn here.

Yeah.

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

Oh, well, we're planning on deploying our current funds very slowly. Slowly. So just because it's what we're spending again, 70 to 80% of our. Yes. Of our sort of 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 like 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 one or two. You could call them like series A type checks.

One or two this year.

Yeah.

Yeah. Let's take 2021 out of the equation. How does that compare to your average pace? One or two.

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 return 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. And so Q1 was still this like last gasp of people able to get rounds done. Maybe not quite as good as in Q4.

It was nervous, but it was happening.

But it was still happening. I would say like by Q2 of 2022, it was nothing but like a falling knife. And then what I started seeing is, but my portfolio companies, I think, were still hitting their forecast, by and large. It wasn't until the second half of 2022 that every board meeting I was at was like a exercise in reforecasting down. And that was the part that was a little bit surprising to me is how much the Fed's crazy loose money zirt policy was inflating the metrics of 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, it's still an opaque world for founders.

Yeah.

So it is interesting, even if it's sometimes boring to you and me. Two 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 one and a half. I'd say one and a half, which means deals per quarter.

Okay.

So one and a half.

Big A's.

Yeah, let's like, let's like leading a series A or series B to call it three every six months. Yeah. You know, or six a year. So I guess that's one every two months. And then, you know, seeds a little different. I think we can do, you know, like a couple of seeds a quarter, maybe even two to three seeds a quarter.

Yeah. And that's, you know, just thinking about it for a moment. 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, as 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?

Yeah.

Do you guys know where do you, 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 like a feel thing. It's really changed. I would say that two years ago, I would say like every seed round looked good because the graduation rate to Series A was so high. And so, you know, if you're paying like 15, 20, even as high as like a 30 cap on a seed round, and it was graduating to a series A round at a 60 to $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 were a lot of seed rounds, basically based on this thesis, which is we're just going to arb the, you know, the fact that there was.

A lot of arb going on.

Yeah. Like, we know this company will get a Series A round source 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 did 20 VC the other day and Frank Rotman from QED's on, he'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.

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. Seed, yes.

That's what I mean. Yes.

Because you're inherently overpaying.

Well, you might be overpaying. There is a lot. 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 of for that incremental proof because it just, you know, 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, 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 to be fancy or to look at on paper, but to justify the risk. Because if you have enough money and Kraft has enough money, you might as well wait. Like, 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. So 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. Yeah, 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, 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 way 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. 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 ones with the right resumes that came out of stripe or came out of yammer, came out of wherever, there's no impact, there's still a surplus of folks who in many cases 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 the 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. 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. It's almost like a perfect gross margin business. There's no incremental cogs to producing more copies. So as soon as you get away from that model, you're getting away from what is unique and special about software. And I think I'd say 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 three times more complicated, minimum. Right.

Many times more complicated. You really have to pay attention to your gross margins. And you know, 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 you know, 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, you know, and all.

You have to look at is the top line and the bottom line. You can't even ignore everything in the middle.

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

What about like a toast? Would you invest in toast today?

Because it's like a super, it's like a very low margin.

I mean toast is 12 billion plus. But it has 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, it's profitable now at billions of top line.

Right.

In a billion of revenue.

Yeah.

I mean, but at one point it won its category. Right.

I would say at the Series A stage. I might miss that.

I miss it. Yeah, too, too, too many weird things going on.

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

It was really hard. They were sort of quasi incubated at Bessemer and I remember Byron told the story that they told them, 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 the 10x to make it work we have to own the whole stack, right? Yeah, but yeah, I mean there's always.

Exceptions that prove the rule, but it's just hard when, you know, the thing I look at is, is there a cogs line in the P and 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 and so now you have to question if you, you have to reprice everything, meaning you have to, you now have to change your pricing of the product to get out of Negative gross margins. And 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, on things like gross margin. Yeah.

You had an insight what 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 if in pure SaaS businesses there's a lot of forgiveness for not being operationally like the best.

Very sloppy on everything.

Exactly. But as soon as you're in a world of kind of again, these physical world components or these like cogs, if you do something like misattribute a true cognitive to overhead to your gna, for example, that could be fatal because what will happen is you'll think everything's great to your series C and then a really sophisticated late stage investor is going to point out, wait a second, that expense belongs in your cogs. And all of a sudden your gross margin turns negative or it goes from 55 to 10%.

Yeah. Then you're now you're.

And all of a sudden, 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. This is a term that we'll come back to later. Have we bounced off the bottom? What are you thinking in general yourself or 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. Certainly from public markets valuation perspective, we certainly have the NASDAQ's up like 30% this year.

Yeah, that was the good investment. Keep your money in QQQ and call it 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 market 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. A lot of companies where there's still a lot of deferred pain.

Yeah.

You know, where they raised huge rounds in 2021 especially, and they've been burning too much money. And yeah, things may have bottomed, but it doesn't mean that they're right and they're still. I think you're still going to see over the next year or two, a lot of companies run out of money and die or have to take down rounds or restructure. So there's definitely some deferred pain in the ecosystem that still has to play out.

Yeah. Let me come back to a sec. Just to show folks here, I just picked two. I picked two that are kind of representative 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 and 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. They're in like kind of a little bit of a different bucket, I think, then just like the, the software bucket. And so that. Those are the ones I'm talking about.

Yeah. One more quick one on this just because. Just your thoughts. I get, I get burnt out, everyone saying how horrible it is on the Twitter and the Internet or X. And because not everything's a downturn.

Right.

Like the overall consumer economy is pretty good. And if you look at. I picked Toast Notwithstanding our margin question. And I took it Monday. We're having Iran, the CEO of Monday, come in a couple 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 meant. So is this right, Is this a downturn or what did we go, what did we actually just go through?

Well, I think you're, 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. 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 and a lot, 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 stuff 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 still happening. Still happening. And that, that was a big change because for the last decade plus, seat expansions has been this huge wind at our backs. And 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 five or six different categories of, you know, sales enablement. They're all now trying to get into each other's business.

Yeah.

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 know why the rest of the economy has held up as well as it has. But from the point of view of if you're in the software business. We've been experiencing recession over the last year or two.

What do you. I've started to go into kind of an ass ticking mode related to this, which is look, this is, this happened. Right. So it was a tough year, but aren't we lapping that? Doesn't, 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, if you were heavily impacted?

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

It'll take another 20 years.

Right. It's like, like Bill Gurley describes as kind of a sawtooth pattern where things kind of go up with, you know, some with you know, little corrections and all of a sudden there's a big correction that starts to go back up. So we're kind of like saw too thing our way back, back up. But it's, you know, it's just never going to be like it was in 2021. I mean 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 had, you have, you have to play the game on the field. Right. So do you want to sit out the game for two years when I mean 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, have been building for 15 years. It's a long time. And so people just kind of 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. I mean, look what's going on in the commercial real estate sector. They 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 the next 18 months.

Should we. And I want to hit a few other. I want to hit this one for fun, but related to this bankruptcy thing. And I know, I know it's very visceral when you're on board meetings and all of this stuff, but should we really care if some of these overfunded unicorns fail? Should we. Does it really matter? I mean, there's so much on social media and the media, but if it's all. Does it matter? Does it matter if 20 or 30% of the 1100 unicorns go under? Is it such a tragedy?

Not to any of you guys? If you're founding companies, who cares, you know? Yeah, it really only matters to the founders and investors and then employees and investors of those.

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

Yeah, it matters a lot.

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

No, no. I mean. And you know, look, I think that software is not going away. I mean, the software is only going to become a larger and larger part of the economy. The. 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 got 10 unicorns, you got around. 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 found a DMR in the wake of the 2008 Great Financial Crisis.

Didn't stop you.

It didn't stop me from. Yeah, it was. 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. I mean, it was not. 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 the war for talent is less intense, so recruiting gets a lot easier. It was getting insanely hard to recruit anybody in 2021, and startups couldn't really compete with big companies which were giving huge salaries to. 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 five 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'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. The coin of fire, of the burn multiple. Every investor update, I get this metric that I, I think, and I think of you every time. The burn multiple. And 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, three and a half years ago, actually. It was. I think it was when we had there was like a three month kind of COVID swoon period in the market.

Might have been six weeks, but we'll.

Call it three months. Yeah. Basically everyone thought the world was ending 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 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. So. But in any event, in terms of, in terms of. Well, sorry, what's the question again? I'm losing.

Well, how do we just. Now I feel like today. So that window was an area where efficiency was incredibly 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. Hyundai went from minus 50 to like plus 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 efficiency. So what's the guidelines for founders today?

Right, okay, so let me make two points. So 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, way too easy. And I'm not saying they did it on purpose, but you just asked the founders, well, is your entire marketing team, including the communications team in cac? And they're like, no, I thought it was just salespeople. So 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 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. And so there's like nowhere for people to hide. It's like 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. This is a good thing about the metric is in 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. And I say this in the blog, but I don't, 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 and 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 if you're 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 that's the.

Point that folks miss.

That's the point, it should be going down. And so like if you're a late stage company or like a growth stage company, like your burn multiple should probably be one 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 probably 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 at 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 growth round, 1 ish public company, 0.

Yeah, it's a good, 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, your burn can grow out of control, right? It can grow out of control the day after demo day 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 going triple digits at 10 million, you 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. You're burning over 2 million a month. Right. And so it can. That, that can sneak up on you, go from 600 to 800 to a 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. 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 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.

It 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 go up even worse than you're planning.

Yeah. So two is the absolute max that your burn multiple should be going into this, like, tough period. And so, you know, 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.

We 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, you know, Salesforce or HubSpot or QuickBooks or you could upload, you know, 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 and then there's a setup process where, you know, we've identified like hundreds of edge cases where the data doesn't properly translate from HubSpot or Salesforce or QuickBooks or whatever. And so we, you know, 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 starts 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, a data analytics team and then they're going to like take all of these data sources and put them in a data warehouse. They'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, you know, 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, you know, 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, you know, the history of it is this just started as a spreadsheet that we would give to companies that were applying for, you know, basically they, they wanted to raise money from craft. 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 kind of See what they were giving us and they're like, whoa, this is really good. Like, I wish we had this instead of just doing it ourselves. So then we basically put it out there as like a free website that they could use. And then the aha moment was we started seeing SaaS companies using it as their dashboarding tool, meaning not just when, like 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'd applied where you could apply to craft to get fund to get reviewed, and they would use the output as their screening as their reporting tool.

Yes, but not just. But again, the AHA was they were using it not just when they need to raise money every month, but every month or forever for their board meetings. And we're like, okay, like the world actually needs a dedicated SaaS dashboarding tool. And the more we started thinking about that, the more excited we got. And look, I'm, I'm like a co founder, but the CEO, the real CEO founder is Ethan Ruby, who is our partner for analytics at Kraft. And he's been in the weeds of like taking all the data from startups and realizing where all the edge cases are and where all the formula errors are and like where the data always gets screwed up. And he's been cleaning it up. And 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 it's completely separate company and I think we can make this the standard for SaaS companies, you know, so I can go today?

SAS Grid.com.

Yeah.

Not AI.

What's that?

No, I'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 at 500.

Totally good deal, right?

Yeah.

And it's free for any SaaS company. If you're under a million dollars of ARR, it's totally free to use. We don't charge you until you hit a million of ARR. So I think you'll find that if you use this 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.