The Very Latest on What's Going on in Venture Capital Right Now (from DisruptTV)

Hey, welcome.

You know, this is an amazing time to talk, right? I mean, we've seen what's been going on with valuations, we've seen what's going on with liquidity for startups and founders and the VC market is, you know, it's. It's kind of weird at the moment. It's a little scary. Like, things are kind of empty in Sandhill, right? Things are actually. People are, like, looking for cash. You know, banks are going away. Like, what is happening in the funding environment and what's really changed in the past six months?

Well, look, there are two different. They sound like one question. I think they're two different questions.

Yes, they are.

If you're on Twitter, if you're on social media, you're going to hear about interest rates and ZIRP and LURP and WERP and Corp and all this kind of stuff. None of it really matters for funding. All that matters is multiples. What multiple of revenue are cloud and SaaS leaders trading at? And we are 30% below the average of the last six years, seven years. We're below the average. We have fallen. We're not just average. We are not. We have not just fallen back to the multiples of 2018 or 2019. We have fallen back to the multiples of 2015 and 2016. And. And a lot of us, you know, day to day, we didn't used to think about multiples, right? In the old days, in the old days, going back with three of us, multiples were terrible. They were terrible at Salesforce, they were terrible. They were always terrible. Like, it was terrible. You'd be lucky to go public at a, at a billion. When I, when I started in SAS, Salesforce had a market cap of $2 billion. And that seemed like a lot, right? Box. When box IPO'd, when HubSpot IPO'd, they struggled to be worth a billion, right? And then everything got really good. And then it got really, really good multiples from 2018 to 2019. And then it went batshit, whatever that. Something insane in 2021. And we haven't just snapped back to 2018 or 19 or even 17. We are at. We're really low. And what that simply means is it. It's much, much, much harder for VCs to imagine they're really going to make money, okay? And when that doesn't happen, everything slows down. It slows down the least in seed, because you can still believe at a tiny valuation. And then the later stage you go, it slows down and it's just natural. It is just natural. And I was literally, I was talking with one of the best startups I've invested in and going to triple this year, okay, on an insane path. No macro downturn, no anything. And. And a top VC turned them down. And I just asked why. That's cool, right? I mean it happens all the time. This is like, well, I was looking the other day at pager duty. It's only worth 2 billion. Like it's not worth enough. I can't justify investing at this company at a tenth the price anymore. And so it's just percolating. All we can talk about all these things and we can talk about LP and liquidity and all these things, but if multiples snap back to where they were even in 2018-2019, all will be good again. It will all be good again. But the weird thing is if you look, we're actually like 2022 was a knife drop. Multiples and everything fell along with the markets. It's actually been pretty steady this year. Multiples are pretty steady. And that's not necessarily a good thing. It might mean we're stuck in these crummy multiples for a long time. And that's the meta question for VCs. And so to some extent it's bleeding optimism out of the system and realism has creeped in.

So with realism creeping in one of your most recent articles, you answered the question, how can a company compete with a company that has unlimited capital? What do you do then? How are you coaching, mentoring, sponsoring founders? Like what's top of mind for them and how are you getting them to adjust to these changes that we haven't seen in a decade?

It's brutal. It is brutal. It is because we were taught everyone learned horrific habits in 2021, including public companies, mind you, right? Every public company over hired. It's just, it was worse for startups, it was worse for startups and we began to come up with metrics for startups. Like it was okay as long as you know you're burning twice as much as you're adding in bookings when there was capital is free. But if you think about it for a minute, that's not sustainable, is it? You can't burn twice as much cash in your book. It has to be inverted. Best case, you have to be burning a fraction of the capital you're booking if you ever hope to be a sustainable model. So we've learned these terrible lessons. Sales efficiency became terrible, marketing returns became terrible. And we're still unlearning them. And look, for startups, the lesson is it's either brutal or it's common, simple. It's like probably you have all the cash you're going to get. Yeah, to the three of us, that sounds obvious. Hey, that's the way it used to be until like 2020, you raised some money and if you were lucky, you got more. And if you weren't, you made your allowance last as long as it could. And then it got inverted in 2021. Each round became easier. It became easier, which has never happened in our lifetimes. Even good times, 2018, 2017, the next round was always harder. It had to be harder, right? It had to be harder. But it got inverted in 2021, where it got easier. And so everyone in that environment, everyone learned the wrong lessons, everyone learned the wrong lessons and they've just, everyone's got to make do with what they have. And hopefully again, multiples will rebound. Even just 20 to 30%. If each dollar of revenue is valued 20 to 30%, that's enough to make most VC math work. But it just is broken today. It is broken today. If some startup wants to raise, that's doing great, wants to raise a 200, 300 million valuation, but deep down you only think it's going to be worth 500. You can't afford to invest. It doesn't matter. If you love the founders, it doesn't matter. You just can't make enough money. And people think VCs make so much money. The truth is the IRR, the numbers are not that great. You've got to beat nasdaq and it's very, very difficult.

You know, it's a really good point. Right? Yeah. The issue about what's on the back end. Right. What's on the back end of the pipe. Right. And almost everybody doesn't realize the back end of the pipe dictates everything else. You're working backwards all the way down to where you are and those valuations are crushing everybody. So as a founder, then, you know, what should I be focused on at the moment? If I'm a founder right now, I got my cash right, you know, is that all I'm going to get on the allowance? What are the metrics? What are people looking for on the back end to say there's growth? Because that story you just told about where, you know, they're doing, they're doing like, you know, 3x. I mean, that's horrible if they can't actually find someone on the back end pipe.

Well, look, I think we're I mean, I hate. I'll use a trite term and then we can dig into it. It's back to basics. Okay, first of all, let's step back for a minute. Even if you're a public company or private company or startup, how do you in cloud and SaaS, how do you get profit, cash flow positive. If you got profitable, how do you do it? How do you make this work? Well, let's step back for a minute. The old days, beauty of software going back to the intuit Adobe Microsoft days is a couple of smart engineers work. They each have their own office, they work really hard, they put a piece of software on a DVD or something and then millions of people use it and it's wildly profitable. And Adobe today still has almost 50% operating margins and Microsoft's are insane, right? And so you have to find something. And what was cheap? Well, look, it was a handful of engineers, right? And very efficient distribution channels. Now we've gotten to the world where everything has become inefficient, right? Engineering is extremely expensive. Sales is extremely expensive, and marketing is extremely expensive. If all three are expensive, all the categories, right, In a public company or private, you'll never get efficient. So the simple answer is something's got to give. If your product's very viral, it can still be. You can still be wildly effective today, even if sales is expensive and you have a thousand engineers, right? If you're hyper efficient on engineering, you know, the classic Instagram or WhatsApp, you can get away with a lot of slack in other places, right? Or if sales is super efficient, but something's not. Everything has to be efficient, but one of those three has to be hyper efficient. And so founders have to reflect about how can I do that Is number one, right? And we could dig it in. The second point to remember is what people really did outside of 2021 when they had a lot of money is why do you raise $100 million? Why do you raise $200 million? Well, 2021, it was because I hired a thousand people. But that's the wrong reason. The real reason an efficient startup raises a ton of money is, is to play in categories where it's weak. To do dominant, dominant strategy, Salesforce does not need to spend any money in the categories where it already wins. You don't need to spend a dollar. They all find you, okay? It's called dominant dominant. And startups can either stay in their lane where they're very, very good, or they can spend a ton of money to compete in verticals in categories where they're either weak, right. Or where they have nothing. And the truth is, if you have a brand, if you have a brand like a Salesforce or whatever, you can actually do dominant, dominant works. Salesforce can launch any product they want. And if they throw enough money at it because of their brand, some customers going to buy it. But it's wildly expensive, right? So I think we're all going to see a retreat from this dominant, dominant strategy, except for a few. Right, because there's no money and everyone's going to have to play where you're strong, right. Where you win most deals and double down where you win. And that's very efficient as well because those leads tend to be very cheap. Sales is very good at closing the customers that are exactly like the customers they closed last week. And engineering knows how to build those features. Right. So we're going to retreat to our strengths is what's happening.

Let's take the line of business that I think is the hardest in any company, and that's sales, in my opinion. What does getting back to basics for sales mean to you as you're coaching these founders and guiding them? You wrote a recent article that said great VPs of sales never hide from a miss is back to basic translate to practicing radical transparency in terms of forecasting accuracy. And how do you. How are you coaching the sales function?

I think it all boils down to, again, we could talk about a lot of things, but like, like multiples. It all boils down to one thing in sales, which we lost track of in 2021, which is that sales reps need to close from three to five times what they take home. Three times for SMB, three to four times for mid market, five times at enterprise. And, and not just some of them. Most and ideally all. And it was tough. But Marc Benioff had a statement, you know, a while ago saying they looked at the data and so many of the new sales hires at Salesforce had closed nothing. And we could analyze why that is. It could be training, it could be market changes. It's not that they weren't good people. Of course they were good people. But the reality is we don't have the room to hire folks that can't. Everyone's got to close 4 to 5x, right? 3 to 5x. And it's the job of a VP of sales and CEOs and founders is to backsolve into that. Okay, if that's what it's got to be. What does that mean? Does that mean we have Fewer reps. Does that mean we change how we do sales operations? Does that mean we don't do categories where we don't win very often? Because the reality is if you have a sales team and you want to go out and hunt new, new territory, you got to pay them like one time what they bring in. It's too hard. It's too hard to go into, to go compete with. I mean, I just got back from rsa. Hey, you go compete with, with Sentinel One, we have no customers. You know, you better pay Those sales reps 1x of what they bring in because it's too hard. But maybe we can't afford to do much of that today. We got to get back to basics. 3x to 5. And then the math is magical. It's the math. Sales should be profitable like they were in the old days and they should not be a cost center. Done right.

What a novel concept.

Well, just infinite capital let everyone play dominant, dominant strategy, even if they didn't realize that infinite capital mean you didn't have to worry about efficiency. Infinite capital mean literally, I wasn't at a single board meeting in 2021 where anyone asked about efficiency. Now it's now it's the pendulums crack through the wall on the other side. Every meeting is about efficient. No one even about your growth rate. It's efficiency. No one asked.

This is the year of efficiency. You know, question here really is, are we going to see a death in innovation though, as funding dries up? Is there going to be like a gap of like 24 to 36 months where we are not going to see innovation in a category because there's no money in that space or. And are we going to keep seeing the bigger companies get bigger as a result of that?

Well, I think it's both. I think we are seeing. It's a fun time to watch the cloud giants accelerate. Who would have thought, who would have thought Microsoft could come back and Azure could be number two and possibly on the way to number one? Who could have thought Microsoft and Google could be so successful? Who would have thought we could see the Renaissance and Salesforce and so many other leaders? Or Oracle? Oracle. Oracle's got its third win. Where'd that come from? Who would. I never would have thought. And so a lot of these and a lot of the money, and you guys know this even better than I do, a lot of the spending hasn't dried up in the enterprise. It's just become much more discriminatory and thoughtful. Right. It's much harder. But. And the money is going to the brands and the big in the big. And yes, it's a bummer that Cloudflare went from whatever 50% growth to 35% growth. That's still pretty good, right? I mean you're still grew 30 something percent, right? But you'll meet with startups and you know how, you know what they booked nothing last quarter? Nothing. Nothing. We bet nothing. Not do you see a Cloudflare or, or a pager to do a pick or is there. You don't see them growing zero. You don't see anybody growing zero do. But you see startup after startup after startup growing zero. But I don't think it's going to kill innovation. It's just going to. It's just going to be the death of these hyper inefficient startups and the death of undifferentiated startups. Of the fifth player. We're probably not going to need the fourth or the fifth or the sixth or the seventh player in the space anymore. But it's okay, right? Software outside of OpenAI, five or six engineers should be able to get a 1.0 of anything out. And there is an infinite. There are more sources of C capital A than there ever have been in our lifetimes. There are more entrepreneurs who had big exits. There are more of this. Even though capital dries up after seed stage, there are so many people that have money to invest in the next generation it's almost actually inexhaustible the amount of capital there is if you're an efficient seed startup. Right? It's not that it's fair. It's not that it doesn't discriminate. It's not that it doesn't pattern match. Okay, it does. It's biased for Stanford grads and MIT grads and folks that graduated from datadog and GitLab. But beyond the discriminatory, there's infinite precede and seed capital, it's just infinite for breakout leaders. So. So there won't be a dearth of innovation. It's just going to be much harder to scale than it was.

We would be remiss not to talk about Saster, your big event coming up. What's happening then? What date is it and what do you expect? I mean it's quite a production. You gave me the numbers the other day, like how big it was like when we're sitting at the Rosewood and I was like holy crap. I didn't realize how big it had gotten.

So yeah, we have, we have 4,000 coming to our more informal event in London June 6th to 7th. So that's London or Europa. And they'll have about 12,000 or so come to. Goodness gracious. I think it's the 9th Saster Annual, September 6th, 8th in San Mateo. And, yeah, it's pretty fun. It's pretty unique. And it's just, you know, everyone's there, there's plenty of CxOs, and there's hundreds and hundreds of VCs, but really, the core ICB is CEOs, founders from, like, 2 to 100 million in revenue, just sharing their learnings. And it's pretty cool. It's pretty. It's pretty amazing that all these years that the best of the best will come and just share their learnings again and again. It's kind of. I mean, you guys know this, but it's. It's kind of magical that the best do. This isn't really. Is.