VC AMA with SaaStr CEO Jason Lemkin and Black Mangroves MD Arnaud Bonzom at SaaStr APAC 2023

We've got a ton of incredible VC content. Arnold owns here is a prominent angel in Singapore, joined us doing another big structured session with GGVC and several others in the afternoon. But to kick it off, venture is like such a. It's such a. There's so many questions with founders. I actually find. I don't know about you, I find venture capital very boring. It's like the same documents, there's like four different terms. Like, from a VC perspective, everything's kind of the same. Like, you do precede. You do angel precede, seed, abc. It seems so boring. But yet founders don't go through this that often. Right. And there's sort of an inexhaustible anxiety and list of questions. So we'll hit everything today. We've got Sequoia, we've got Bessemer, We've got so many of the top funds presenting. But thought for folks that wanted to ask extra questions about venture investing in others today, we could do it. And so just. I'll open it up to just general questions, but I could frame things a little bit. The only thing I would say to kind of kick off the discussion, an executive, before I started asking me the question, it's like, you know, when. When do you think we're going to get out of this downturn adventure? And I'll. I'll kick it off. Your thoughts are, I don't think there's any downturn in venture. I think there's just a reset of. And folks that have not been raising capital or seen this side of things since, say, 2018 will think this is a terrible time. It's terrible time because things got insane and peaked in November 2021. Like, we'd never seen the types of. Not just startup rounds and multiples, but public companies were trading at unprecedented sizes in November 2021, and then it degraded and plummeted to a low in November 2022. Where are we today in. In February 23rd? Actually, we're better than November 2022. The IF Cloud stocks. If you just invested in cloud stocks in November 22, you'd be up almost 25%. Like, it's pretty good. Call it, call it a day for the year. You made 25% on your money from the low. But we are, we are. We are still somewhat lower than we were in 2018 and 2019. And we're kind of consistent with what SAS Venture Capital was through 2018, through the boom. So that's why it feels dire to a lot of folks. It feels dire, but actually it's just a reset to the world where the best public companies are worth several billion dollars. They're worth several billion dollars. You know, freshworks is one of the, you know, the great breakouts from India. What's their market cap? 5 billion today on 400 million in re. Something like that. I should look it up. We should look it up. And that's an outlier, right? The, the, the, the gitlabs of the world. 5 billion. So like if those companies are worth 3, 4, 5 billion, it's very hard to be a unicorn today. It should be. There's not, there's not a lot of room so. So I'll sort of shut up with there. But I don't think it's dire. It's just we're back to a world what, what got inverted for two years from late 2020 to 2022, we this weird world happen adventure where each successive round got earlier easier. It never got. It always was supposed to be harder. Right. There was always supposed to be a winnowing from each round and then it got inverted. Got easier, didn't it?

Yeah. I think is why I don't really see that as maybe like a very tough time now. It's more like we readjust to what it should have been. So it just had been way too crazy in the past and then now we go back to multiples and numbers. That makes more sense. I think it just went out of the line and then now we're going back to something more reasonable. So during that time you can also have seen a few VCs and a few entrepreneurs with a lot of discipline in terms of funds manager is don't raise too much money. So that is difficult because a lot of them make their money out of management fees and not so much on carry. But it's the same for the founders. A lot of them also didn't manage to have the discipline to don't raise too much because money was so easy to get and a lot of them were willing to get crazy valuation.

But.

But I'm seeing now like people that are building their second or third company here. Even if one of them got an exit with Google here in Singapore, they're only raising 1, 1.5 million at a 8 to 10 million valuation. Where they can even if today still raise 5 million at a 25 million valuation. But they don't because they know that is going to be very difficult for them in one or two years down the line because they have raised too much money at a too high valuation. So I think the one having discipline will go through those time in a way better way than the one that just take all the easy money. So I think we're just back to what it should be. And that have been some crazy times. So even if now what is described as a down run, I just feel is. No, that is the price it should have been. So it's just an adjustment to go back to where things should have been since the beginning. So it was too much easy money.

So let me open up. There'll be a lot of good content today. So what questions do folks have about anything really but venture and fundraising today that can be helpful with any questions. What excites about 2023? I'll tell you, I don't, I mean at a personal level, like I don't try to follow any trends. I don't think renaming your company to AI is going to change the world. I don't know, I'm a pretty boring guy and what I found and I did a Saster post, you can search it and I updated it a couple years ago. What percent of public SaaS companies are new versions of existing categories? New versions, it's about 80%. Okay. There are breakout companies that do things we've never seen before. But everything from Freshworks to HubSpot to Salesforce to pick like these are actually cat categories. They get reinvented again and again and again. And personally for me, of my top investment, some have been new categories. Right. The second one I did was a French one, Algolia, which, which did. It didn't invent search, but it did invent sort of search as an API. But even then search is like an old category, right.

Google was doing it before for their own website. You could use Google for sure, for sure. So it's done, I think is reinventing again.

Yeah, but not to ramble. I personally I, I don't look for the trendy things. I look for the founders that see white space in a space that's changing.

Right.

Because every category changes every five to seven years. And whether it's mobile or maybe it's AI, maybe it isn't, or just something changes in the stack. Right. Compute. And I like the stuff that just gets reinvented and the best founder. So I don't have any thesis whatsoever but certainly that's me. And you will find plenty of investors are very, very thesis driven. You can see it on their Twitters and others. But mostly it's these. You know, everyone's looking for phase changes. I mean the cynical thing about Venture to. Maybe it's not the point. You're saying. But everyone's looking, it's tough. Everyone's looking for hyper growth, right? Because if we step back, if we want to abstract. If anyone's interested in the economics of venture for some reason, we'd be happy to explain it. But the bottom line is you really can't make money in ven venture other than fees, unless you have companies that in 7 to 10 years get to at least 100 million in revenue. Okay? Now it doesn't have to be 100 million from the day you start your company like UiPath took 10 years to get to its first million in revenue. It really does not matter how long the very early days take. Okay? But once you, once it clicks, once you get to a million to 2 million in revenue, you've got ideally 7 years, 10 years at the outside to get to 100. Really 200 million for an IPO. And, and so realize if you're frustrated with VCs, if you're trying to learn the process, like anyone, you got to understand their business model, right? How can you go. So if you've already hit 1 or 2 million folks, that's why folks are going to be looking for you to at least double and ideally triple at 1 to 2 million. It's not because VCs are completely jerks, but think of put it in a Google sheet and do the compounding. How can you get from 2 million to 200 million in 10 years? There's the, you know, Niraj from batteries. Summarize it as the triple, triple, double, double. Right. Two years of tripling. Two years. That's just the mathematical rate it takes. So any. Along with a saying for me, I'm. You know, if you're, if you're. For me, when I've been fortunate enough to invest at like a million in revenue, you can already see that happening at a million. It's already. There's a handful of investments I've done that were already at a million. Pipedrive was my first one, which was for CRM, which sold for a billion and a half. It was already growing about that rates at a million. My third investment was Talk Desk. It went from 1 to 15 in one year. Right. And. But it was already growing at those rates before a million. I think you have to squint. You have. You can either look for very high growth at $5,000 a month. Like it might be a signal, but it might be noise. You're not sure, but you're looking. So we're all looking for that. And so a thesis investor is thinking hey AI is going to disrupt the world. There's going to be 20 Jaspers. So this AI is going to drag us to the top, right? Or this new thing in cybersecurity or this new thing or other folks are just looking for the world to change so that some external factor is driving up. Like I mean Talk Desk is worth at least it was worth 10 billion on paper. That was one of my best invest my first investment with $1 billion position, $1 billion position as an investor. And what the hell happened at Talk desk in 2014 when I invested? I didn't even know it was eight people at a million in revenue. But as dumb as it Sounds today, actually WebRTC didn't really work in the browser until 2014. And so as, as, as rudimentary as web RTC was in 2014, literally you could not run simultaneous call centers in a browser before 2014 didn't work. So even though it went down and you had issues like that was a phase change, I didn't understand how it works.

Right.

And so that happens in ventures. Sometimes something changes in the market and all of a sudden, you know, web came to the now all call centers are web enabled. But it was so late because of a technology change. So you could add some thoughts, but that's my rambling.

I think what excites me now especially in Southeast Asia is to have a lot of second or third time founders. So I think that is quite interesting in the region because they have experience. You have also way more talents now like you look a decade ago finding a product manager you need to recruit at Singtel. Now you can tap into a lot of people that are being trained here or people move back from the US So I think the talent pool is way bigger. Not saying it's easy to get the talent, but it's bigger, there's more capital looking at the region. So I think that is quite exciting. Now what I want to see more would be, I mean in the early days here we got Zopim who got acquired by Zendesk, that started out of Singapore, but if you mentioned Tolldesk, that was studied out of Portugal. So what I would love to see more in the region is also people that building globally or for us like what you see a lot in India and see a little bit less people building only for Southeast Asia because most of the time that is going to lose you so much time. The market here is still very small. So I want to see more people going US that was Algolia. I mean you get a bunch of them like your Algolia front tall desk, all of them studied between France and Portugal and they go, I mean the first two went to YC Talldesk, went to 500 startup. So they use accelerator to land there. And they do what I like the arbitrage between let's keep technical talent in Europe because it's great people and less expensive than the US and maybe easier to retain and let's get the market in the US so let's move the CEO there. Let's have the marketing and sales because American are way better than the European on those things and let's just get the best of both worlds. I think that is interesting structure to have when you come from a market that is not so large. So I wish to see less people looking after Southeast Asia when it doesn't make sense. And I feel it makes sense if these days you are like a provider of solution that most of the company here need. Meaning if you're x0, maybe you can have some good growth here in the region or if you're exended, if you do payments, why not? But compared to us it will be still a small market. So then it's go quickly to the US but you may still be able to get some good growth here in the region.

Well, anybody else have any question on venture fundraising? Any of these pieces? Don't be shy or be shy if you like. Yeah, it's such actually in my little opener. Next it's going to be half of what I talk about multiples because it's such an important question. When I was a founder, I didn't even know what multiples were. I didn't care. I was building my company. Every dollar I made. I was a second time founder the second time. Every dollar I made for my first startup I just put into one etf, vti, the Vanguard Total Stock Market Index. I'm like, I don't have time to worry about investing my own money or multiples. But today founders need to be very savvy about multiples because in SAS basically we'll dig into it later. You know, from for a decade multiples were basically the same and they were crappy. Public Companies traded at 5, 6, 7 times revenue. Some did better, some did worse. There were some horrible times, like 2016, the world ended in 2009. But for the most part multiples were consistent and crappy. So you would try to get to 100 million in revenue if you were really lucky, like HubSpot Speaking, you would IPO at 800 million. HubSpot got to 100 million, IPO'd at 800 million, that's 8x. And basically startups for a long time until 2018, startups basically were all valued at 10x if they were growing quickly or 5x if they were. Okay. That was my whole life as an entrepreneur. Like 10x, 10x 5x. And so then the world imploded, right? And then exploded with COVID and we saw Zoom went from 1 to 4 billion in one year in revenue. Zoom not only was the almost the fastest growing SaaS company of all time to get to a billion, then a one year it went from 1 to 4 billion. And so combined with multiples got crazy, right? And founders, if you've only been a founder for the last couple of years, you don't even know what the world used to look like. So I'll ramble where we don't know where multiples are going to settle at the end of this year. They are not at all time lows. As we started, all time lows were November 2022, we're up 20 or 30. But they're still low. They're still low. And so my general view is that basically what I see, and this is a very U S. Bay Area centric view I'll give you, I don't have the local view. Basically seed valuations in the Bay Area have not changed that much. And after that, basically everything's getting done at 10x ish. If you're really good 10x current revenues. And here's the important point. If you're on fire, if you're on fire. Well, this is what I've learned from my portfolio. The top ones are being done at 15x current revenue, okay. And it's almost, there's almost the growth markets. So growth is almost frozen still. There is almost no, you know, Excel Growth did one investment last year, 30 something the year before. It's frozen. Okay, it is frozen, but, but it's warming, okay? The, the ground is thawing because people have, they've done the triage in the portfolio, they've done some downruns. They've done. And basically they've internalized, they've taken a hit with their LPs, right? They've said they've, they've gotten through most of them. If they haven't shared their audit from last year, they've already given them a heads up that hey, our portfolio's down, right? And so they want to deploy capital again, they're ready to get back to work. The terror kind of peaked in November 2022. But the best ones, the best growth investors have decided 15x current. What's your growth rate next year? Is that 10x forward, 8x forward, whatever. That's their ceiling. And so they're hunting. They're hunting. Okay, is there someone at 20 million ARR. That's growing 100% or more? Can we get them to do a deal at 300? Okay. The best ones, not the average ones. Right. The problem is a lot of the ones at 20 million are growing 100% or more. You know what they raised in 2020, 21 at 500 or a billion. So they're on. The problem is all these companies are structurally unfundable. So that's what I've sort of seen is this I people are. It's still frozen, but people will do this 15x at the later for the best ones. But that's the ceiling. That's the ceiling.

And I think that is a good indication point for you on your fundraising. But don't look only at that because if you just look multiple. That is just a picture. What also Jason mentioned is also the speed of growth, which also something super important. It's also how fast are you growing that. But you will see VCs also look at a lot of other things like at different stage will be also how your team is structured and et cetera. So if you want to look at roughly an idea about that, you can look at the SAS napkin done by Pont 9 FG Labs also do a SAS benchmark. You can see by different stage what are the expectations across different things in terms of traction. And you can see the size of the check you can raise and at which valuation. But you need to also do kind of this discovery by yourself and talk to a bunch of investors and see how much they're willing to give you as a multiple. Because that is how much you will see the market is willing to offer at this time. So if you was 18 months ago is completely different price likely than today, except on the early stage. So you need to look at what people are willing to offer, but you also need to know how much money do you need and how much are you okay to be diluted across that round. So it's not. It's again, you need to have that discipline and knowing about how much money. And it's not because people are willing to give you 20 million that you should take those 20 million. Maybe you could be. Wait a minute. For the growth. I want to do for the dilution, for everything. Now I'm only taking 7,8 million. And it may tap into you later on. Not in six months, more like in 24 months. And then we move to the next phase. But you need to be careful of that also. So it's a balanced act to navigate that fundraising. And definitely here the disadvantage is on the founder because you have not so much data point when the investors will, especially at the early stage, will have a lot of comparables across all the company, how much they pay for other investments. And the only way for you is to get as many as possible term sheet to get a sense about what the market is willing to offer.

Yeah. And if I had to summarize all of that into one one metric, if you've mostly been a founder the last few years, and that's your frame of reference for fundraising, I would just assume two things, and they're really just one thing. You're going to be able to raise half as much money at half the price, and the money's gonna have to go twice as far. You're gonna have to be twice as efficient. And I just did this closed session with CEOs with Pavilion, which is like a founder group, and all of millions in revenue up, and they were crestfallen when I said that. What do you mean I have to do twice as much with half the money? I'm like, I'm sorry, I'm as empathetic as it gets. But the last two years were insane. Because what happened was the last two years, you could raise four times as much money and be half as efficient. The efficiency was if you folks, and not everyone here is so privileged as folks in the Bay Area, but folks became wildly inefficient. Wildly inefficient. And the markets sustained it because the capital was there and it was grow, grow, grow. And so the simple math is, you know, half as much, half the valuation for later stages. And importantly, you have to be twice as efficient. It has to go twice as far. And I don't know about this audience. I'm still. But for the founders involved with the Bay Area, they're still resetting to the. To the third point. They're still resetting to having to burn half as much money to get there. And I would say most haven't gotten there. Most have reduced burn. Maybe they've done a small layoff. Maybe they're. Or they've just done a quiet freeze or slow down. And, you know, they're not spending quite as much on perks. But that really doesn't get you there as a startup like these are. They get you there a lot if you're a public company, but they haven't fully reset the fact that you're going to have to get there with half as much money. Right. And there's a lot of implications. So long winded. Answer the question. But multiples I think is something that I don't think founders had to even really understand a few years ago. Now it's got to be part of. You've got to be monitoring it almost religiously just because it just gives you a pulse of where all venture will be. And the last point I'll say and then we'll take another question. It's in my next session. So people in seed investors are pretty chill because. Because what can you do? But later stage investors got despondent last year as it was clear their unicorns were going to run out of money. They're going to have large write downs. It was, it was terrible. Again there's been a bit of a reset, a bounce. It might be a dead cat bounce but a bounce since November. Folks are calm but sorry, maybe I got a little bit distracted on what I thought was the most insightful point I was going to make. Oh here's the point. If we, if multiples go up about another 20% from where they are today, we'll be kind of back to the old normal. Okay. And what you should look for for multiples is the last point and I'll be redundant in the next session. Once the top public companies are trading at about 10x on average 10x or above, that's normalcy for venture. And you can make a spreadsheet and you can talk about why and how ownership works out to distributions and. But it's pretty hard to build a 3x venture fund in SAS if, if we don't have 10x multiples and we're not there today and you know there's a handful that trade at that for sure there's, there's cloud flare and others but when the average pretty good public and that's that's rarefied air pretty good public SAS company. But if you go on the BVP cloud index which is a great site and I'll quote it and you see that the top good ones are all at 10x or above, then you'll know that nature has healed in SAS vc. Nature has healed, people can make enough money and just venture is a hard business to make money in and it free. Everything's frozen when multiples are Too low because we lose oxygen in the system.

So I think the average for those 75 companies is 6.96.

So it's, it's, it's going up, but it's still, it's still frozen. It's still, it's still kind of broken. Right. So, anyone else got a question? Anything's good. Don't be shy.

How's determining the multiples? We spoken of revenue?

Yeah, there's terrible advice on the Internet on this. How is, how important is profitability?

No, no, I'm saying how is profitability as a factor?

Yeah, yeah, let me hit that. You can get two perspectives here. I think there's. Look, the Internet's full of bad advice. At least it's after we try to give you pretty good advice. Okay. From a lot of voices full of terrible advice. This one is so confusing. Profitability does not matter. Capital efficiency matters. And how much it matters varies. We are at a period now where it matters a lot. It matters not just to VCs. Importantly, it matters in the public markets. If you want to, if you want your stock to trade. We have companies like sentinel one. Oh my God. Growing well over 100% at 500 million in revenue crush. Their multiples are terrible. Why they're investing in growth. Okay, but no one cared in Snowflake a year and a half ago. So we are at a phase where capital efficiency matters in the public markets. And therefore for a variety of reasons, it's going to matter for startups and vendors. But. But no one wants what no vc. Here's the bad advice. What no VC wants on Planet Earth is slower growth and profitability. No VC wants that trade off. Because going back to the earlier point, the game is to go from 1 to 2 million to 100 million in 7 to 10 years. It really doesn't matter whether you're profitable so much as that you're able to fund the company to get there with good unit economics. And so sure, in 2021, if it took 200 million, so be it. No one cared. Today it might need 40 or 30, but there's no VC on planet Earth that's going to say I'm excited about 20% growth and profitability versus 100% growth and decent capital efficiency. Because it does. It doesn't get you there. Right. So maybe, maybe you knew that and it's not helpful. But I just wanted to hammer that point in because no one's excited for crummy growth and profitability. It just doesn't get. That's the wrong. That's the wrong message that some on the Internet people think is true. Right.

I think in emerging markets, some VCs may care about you being profitable because they have way less risk adverse and a lot of them have more a PE mindset than a VC mindset. So on a PE mindset, profitability matter a lot on the vc, way less because you look at very different multiple. As Jason mentioned P. You may expect your company to do 3-5x VC. If you expect your company to do 3-5x, you're never going to return 3x out of your farm because most of them are going to die and then are not going to cover the one that the one that succeed will not going to cover the one who died. So here in the region, a lot of VCs may care more for that, but maybe then we can argue they're not VCs by doing so. What they offer you is everything equal compared to another company. He offers you also more time for your fundraising because you will not have much deadline about you're running out of cash. And some VCs will have to move maybe faster if you create enough FOMO to invest in your company. So I think that can help. But it really depends on which audience you're talking to.

Yeah, it's a good nuance. Funds that non US style funds that aren't planning on other capital fundraisers or more PE like may like that trade off. Right? But the traditional world of folks they want efficiency today it's very hard unless you're open AI. It's pretty hard to be inefficient. But the point is you can't change the math of when you have to get to 100 million, right? No, people will give you. People got a break last year and they're still getting a little bit of a break this year. And. And VCs definitely have taken the pressure off their existing portfolio companies. And this is why the advice is kind of bad on the Internet. If you're sitting on 30 or 40 companies, okay, and you're running out of money yourself as a vc and a bunch of your company's growth has slowed, but they don't need any more money, you're like, oh, thank God, right? Because I got to go deal with this unicorn that has two months of cash left. So I've got a bunch of. I mean it's kind of patronizing, but VCs really do think of their investments as kids sometimes, right. And if these two kids growth is slowing down, but they don't need any More money. They're not on my problem list. So there's a lot of triage going but ultimately that doesn't mean that they would fund that company from scratch. That doesn't mean they would put money in today. It just means my dollars are already in and thank God I don't have to put more into this one. It just leads to a lot of confusing advice. No, no, no, VCs do not want none of that's correct. But keep asking with your question that he compared the investors year to to the Bay Area. Oh yes, right. And when he's saying that so they might not invest I fail to really understand that.

Okay so if you look at a fund, let's say it's a 100 million found, you're going to deploy 80 million because it's 20% for management fees. Out of those 80 million let's say you do 40 investment for zero. The thing is you're going to only get likely two or three companies that are really going to have an impact on how much you return to ulps. Right. So as Jason mentioned it, you just have a very few years like 6, 7, 8 years at the time you reach 1 or 2 million in annual recurring revenue to grow that to 100 million for likely to be public listed through that growth. What matters to found is those two or three companies that succeed. The thing is you should it doesn't matter which company fail and don't judge a VC on the company, they miss all. The company that fail is more about which one succeed because you only need to be right two or three times. Doesn't matter if you're being wrong 37 times and then it's about focusing on the big outcome and of course how can you support the other one. But what really matter is the two or three that work. That is what you see more in the US with a lot of competition in emerging markets they prefer to have more safe bets around all the companies and if it's kind of oh if it could be a 10x across all my portfolio companies I'm okay with that. If each deal bring 10x in the US it will be more like that company. I need to think about how can I make Android X out of that company. So it's what I feel in terms of mindset. Some are running a VC, some are running more PE firm and the PE is maybe more like 3.5x expectation per deal but they will do very few deals and they're going to be very hands on. So it's a very different type of business. But you also see it on terms in emerging market. The terms they ask you with a lot of terms will be more like PE terms than VC terms. They, they optimize too much on the losing. They don't want to lose their money. But this is the game of losing your money and being right just a few times. So it's why you need to understand which audience are in front of you and how you are going to play that audience. So that's what we mentioned. Profitability maybe resonate way more here in Southeast Asia than it will resonate in US And US they may don't care. It's like, are you growing fast enough? Can you give me my Android X? And they want you to take that risk. So here they will be more cautious.

Well, you know, to simplify all of it, thinking through it, when you meet there's all, there are all different types of investors and the investors you're going to hear after this, you're going to hear from Sequoia and Bessemer and GGVC and others. They're all going to have this, the same answer to this question that I'm going to tell you to ask everybody, but not all investors, especially in different smaller markets. Ask them what their, their goal is, what their average exit size is. Ask them what your average exit goal is and the average exit goal for a big U.S. fund, even if they're the local versions, it's 2 billion. They want some at 10 billion, you know, and 20 billion. But the model, ask them what their model is at 2 billion and you'll hear, I'll give, you know, not to over Europe this, but when I invested, my second investment was venture investment was this French company called Algolia. And back then Europe, Europe was a very local market. They did not believe in unicorns until 2015, 2016 and another. And I was able to buy more stock in the seed round than I thought I could get. And you know why was because Alvin, which is one of the top French capital firms, said we can't afford to invest in the round. I said, what do you mean you can't afford? He said, well, the valuation's 12 million. I said, it seems like a fine, I don't care. It's a good company. Like my problem is I can't, I want to put foot, invest 2 million at 12 million. I can, I can't get enough money into this company. I'm like, what do you mean you can't invest? And here is my aha moment, okay? And this is totally different in Europe today than it was in 2014. But what, what Rafi said is our exit model is 50 million at our fund. It's 50 million now. It changed in about a year. Okay.

Which also you can understand because at that time in the French ecosystem, there wasn't much big exits. It wasn't like large companies. By the way, Golia Last one was 2.25 billion. Yeah. So it's huge. 12 million was like.

But, but see, the point is they couldn't invest because think about it. At 12 million pre 14 million post, to get to 50 million, just to get to 3x, there has to be no more dilution. Right? So if you're. If you're talking with any of the type of VCs that are talked today like they're looking for $2 billion or higher exits now, it's okay if some don't do it, but to invest, they have to believe it's possible. It's possible. An investor with a $50 million model, like a P firm, they may be all smiles and giggles and care about profitability, but how much money can you put into a company? Like a couple million bucks, right? Because there's not enough room. Like, if someone comes in and invests at 5 million post and they put in 2 million and buy 40% of your company and the exit model's 50 million, there's not a lot of room. Like, you can't even raise another round. You're done. You have one $2 million round in that model. And. And so. And so those investors may be a better choice for some, but they'll. They'll work with you very differently. Right. I have a friend of mine who, Canadian entrepreneur, thought he was kind of US Style, but. But, but raised money from a VC in Canada. Okay. Nothing against Canadians. I love all Canadians. But he didn't know it was. He didn't know what he was getting himself into. And he's like, I raised 12 million bucks. And then the founders got fired. Okay. And why. These are great guys. I know. What happened? Well, it wasn't really venture capital. It was really a PE firm. And they really gave them each 6 million of the 12 million. A lot of money, right? 6 million bucks each. But the exit model was 100 million and it was done. There was no more capital going in. It was all. It was just. He didn't ask the questions, what's your model? Right. And so he thought he was raising money from a VC firm, but he was really doing a PE deal where they wanted to buy most of the cap table out, they gave the founders millions but they took over the whole company. Right. They ended up buying 80% of the companies.

I think a lot of thing we mentioned today is also about for founders to really understand what is the VC business and also get a sense about who are the LPs and how LPs look at being part of those VCs. So if you talk to a VC, few question you can ask is get a sense about what is the LP base, get a sense about what kind of profile of those people. But also in a fund, if you go talk to 100 million found, it's also understanding what is a check size compared to the size of the fund and the number of portfolio companies they want to build. Because then you will understand are they doing a very small check in your company, are they doing a very large check compared to what they're used to. So then you get a sense about how they're going to be involved in etc. But I'm always very surprised. A lot of founders don't really ask much question to gps and you should look that as a double opt in is you also decide who come in your company. Don't feel like it's just a privilege to get their money and their terms but you also need to do your own due diligence and you should talk to all the founders and get a sense about how those VCs behave before you take any money. So I'm always surprised by how little people do in terms of homework in understanding the VC industry and to who they talk to. You should really spend time there because most of the VC will only make your company successful. But as Jason mentioned, a bunch of them can destroy your company.

Yeah.

So be careful on who you bring on board.

Yeah, don't. And make sure we have time to take a couple more questions before we have to move on. Most founders don't do enough diligence on the VCs they partner with. They do the wrong types of diligence. If nothing else. If nothing else, get to know their business model just like your customers. If you have a big customer you want to know how do your software work? Sarah, what's the business model? So understand like okay, tell me what, what, what you can just ask a Columbo open question. What, what? What do you hope to have happen with this investment? Just, just ask. You'll be shocked what answer you might get. What do you hope would happen?

Or just a successful investment look for you, right?

Or you can ask what if I, I Or you can do like a self effacing version. Look, we want to build the next whatever, Google, but what happens if in a couple years we sell the company for 100 million? This is a great leading question. What happens if 100 million is a lot of money, right? But if you ask what happens at 100 million and you, and you and you kind of ask off the cuff at lunch without saying that's your only goal, like you have no aspirations beyond that, because that's a flag, you'll get a great answer. Like if someone asked me what would happen if it's over 100 million, I'd be like, it's fine, it's great. Like I'm all about founder power. Like that's great. Probably won't make much of a difference to me, but it's good. Like it's great. Like what if that's what's good? That's, it's like a telling answer, but you're not hearing me. Like, stand up. Like I'm like 100, $100 million, right? Because for me, you know, I've, I've invested for smaller funds. I have 60 million, right? So if I bought 10% of your company and you sell for 100 million, I make 10 million. I've only gotten 15% of the way that I haven't even, it's not even 1x. It's like great, like I'm all for you, but it's like, you know, it's only a snack. It doesn't even get to the main course, let alone, you know, and any. So those Columbo questions, you know, learn the LPs, talk to 28 other founders, but just get the best VCs are really good at. This is at the end of a process. They'll take a founder out to lunch and they'll ask some unguarded questions that you think are just chit chat. But they're really good questions. And I'll tell you the best question I ever got from a VC who then did not give me a term sheet. But it's, I really liked him. He took me out to a long lunch in downtown Palo Alto and at the end he's like, Jason, just one last question. Like, what's the first thing I'll learn at your board meeting that I don't know today? It was such a good question because I was just. And I gave them the totally honest answer, right? But it's like, and they're, they're good at.

So.

But founders don't do this enough with the VCs like you're in sell, sell, sell mode. It's weird. These people aren't even human. But ask, just, just ask the question. What's, what's your, what's your goal here? So. All right, we'll try to do two more questions before we have to. To break. Yeah, thanks Jason.

And thanks.

Financial fraud in their portfolio. I have said that. Yeah. And I'm wondering in light of like these everyone file kind of FTX and you know, it's changed. It's, it's. I mean look what there's a lot you ask. How could these things happen? How, how could these FTXs and fast and all these crazy companies happen? And, and, but what happened was in 2021, you know, if you, if the company was growing quickly enough and you invested at 100 million valuation, which is high like but four months later it could be worth 500 million or a billion. And so on paper you were brilliant and one of literally my favorite SaaS investor. So many unicorns public companies been doing this forever. One of the most cautious people I know at the peak of 2020 want to invest in one of my companies. One doing well and he's like, I'll just give him a term sheet this afternoon. Just tell me if there's anything I need to know. Nothing now. He did have me. It's a decades long relationship since I was first going. But I was shocked. Did not need to talk to because, because this guy, he's not that he was stupid. He could see the math. He's like, okay, if I invest today at 300 in the crazy world of 2021, it's going to be worth 2 billion. Like and I want to do 50 this year, not, not 2. Because the pace of investing was so fast and furious that people intentionally did not do the diligence. Okay. It was an intentional choice. And Sequoia was almost honest about the FTX thing, which is like, yeah, we should have done more. We got caught. But like the pace was so furious and so I think we have reverted back. But not all the way back. People are still shooting from the hip. I think investing over zoom encourages shooting from the hip. For a lot of VCs, they don't do the extra work. What I would say to folks is just be aware of it. Get your acts together, don't present fake. The number one bit of advice I could give is too many founders have always done this in SaaS. But it got really bad in like 2021, early 22 people would present pseudo Numbers, they would present numbers like quarterly MRR or they would take three months and combine them or worse. What I, this is the fraud I have in my own portfolio. And I'll put fraud in quotes founders including accelerating bookings into one number. Like I have a one year deal, I have a, you know, 120k deal. It's 10k a month. Well, I'll just book it as 120 this month. That's fraud. That's fraud. Okay? Contracts that like our pilots that are unpaid, pretending they're paid. Just get, get your act together and don't. There's no upside anymore to these games. Right. And you will probably get caught and then the deal won't happen. Right. You can't walk yourself. It's really hard. Even if there's a term sheet, it's really hard to walk back fraud. It's very. So just don't, don't, don't, don't, don't, don't do it.

I think it also depends a lot on the stages. If you have very early stage investor, there's not much you can do in terms of duty. So I think on that side is unlikely to change. You get some early stage investors. I mean for an example, he shared publicly fabulous green Dai. He often do a deal just by one hour call or even shorter in any commit. And he admitted that I think his first hundred term sheet he didn't read anything, he just signed. It was like okay, maybe get one or two fraud. But it was kind of. And he was surprised he didn't get any. But Sequoia for example is, I think they're working with one audit firm to go through a lot of their portfolio companies for Sequoia India, Southeast Asia. So you're going to get more scrutiny from investors at the later stage for sure. And maybe don't call your company with a name starting with the F right between Frank FTX and fast.

Well look, here's what I've learned. The best founders don't do this stuff. The best founders, and this is why venture capital actually works despite all of its warts, okay? The best founders, some of them are nice. Some of them are a little rough around the edges, okay? Some of them make you feel good when you're around. Some of them make you feel like it's a lot, a lot of intensity in the room. But they all have integrity. Okay? You can't lead a hundred people, five hundred people, a thousand people if you don't keep your word, you can't. There has to be levels of Trust and integrity to do this. And when money got thrown at everything in 2021, people without integrity raised a lot of money. Okay. And that. And those folks do have their cousins on the payroll. And there will be more stories of folks that bought Ferraris and Lamborghinis and, and certainly Teslas. You'll hear hundreds of those come out from low integrity people. And but if you invest, if you take. And this is why for me, investing over zoom's hard. Right? If you invest in high integrity people, this stuff doesn't ha. It just doesn't happen because it's not worth the founder's time. They're so focused on going up that hill recruiting the great team. You can't. The self. There's no time for self dealing with it won't get you there. Right? It literally won't get you there. And, and that's why a lot of the times the best founders you'll often hear a story and it's not that I want this as an investor be like, oh you know, I had to go four months without salary or like, you know my, I cut my salary so I could hire her or him. And it's not that you want that but when you hear those high integrity stories, like you know it's going to go well. And if you see a hint of low integrity, a hint of low integrity. I haven't lost a lot of like I haven't lost a lot of venture money on low integrity. But unlike angel advisor stuff, I kind of experiment and did a wider. A wider. And I have had low integrity situations there and I never made a dollar. I've had what I used to when I was getting going. I was an advisor to an advisor to a bunch of CEOs and I just wanted to learn different spaces. Okay. And four of them I made no money on at all on my advisor shares. Okay. And what happened? There was something smelly that happened in the situation. Three of them promised me X shares and gave me less. Okay. They said I'll give you a hundred thousand shares to help us. And I got the paperwork at 70. Okay. Does it make. I'm not doing it for the money. But when I saw that they all failed, all the CEOs that said they would give me 100k and gave me a hundred percent of them. Many of them raised a lot of venture capital but all the low integrity people failed. So I think it solves it and that's why this. But there's. And for founders realize this now that things are harder. Remember that. And People forgot this in 2021. There is trust here. So build trust with. Because it is scary for vc. There's a lot of trust and you do have to have some fraud. But there is a shockingly amount of trust involved in venture investing. And just don't forget, don't take it for granted. Right.

I think it was Warren Buffett. He was saying like you need to look at three things in people like intelligence, energy and integrity. And if they don't have the last one, don't bother with the first two. So it's the same thing with founders.

Okay, I think we have time for one more question and we can go to the next. Anyone else got one more question? Do you see any changes? You know, I think the issue with M and A is. And I'll answer the question, we could wrap this. It's really interesting is that, you know, for the public companies for the most part get. Can't help themselves but get M and A wrong. This is another place the Internet's all wrong. Okay. Public companies are subject to the same feast and famine that the rest of us are. So people are making fun of Salesforce for spending $27 billion for Slack. Well, Salesforce's stock was at an all time high and Slack is still doing 2 billion today. It's a pretty. It's like the best thing they bought. So like you can't help yourself now. Sales. Yeah. Why doesn't Salesforce go buy another Slack for 6 billion? Well, Salesforce's stock is down by half. Its growth is slowed to the teens. It's under activist pressure. So they've lost the ability. So M and A, like you think M and A should pick up in when things are calmer, but it does. It doesn't happen that way right now to some extent there's a little bit like, you know, the Tamo Bravos and the Vistas, they have some insulation from this, but even they don't like. Vista is struggling to close its latest fund, even though Vista's historical results are really strong. Right. Tamo Bravos. Bravo is incredible. But their last fund is, is it's J Curve S, but it's still negative irr. They're not immune to these issues. So M and A does not pick up when multiples go down. Okay. That's the most important part to think. Even though the Internet says, oh, everyone should go buy on a buying spree, you know, the handful of companies whose valuations are higher than a year ago should go on a buying spree. And they may, but that's you know, like that's the trade desk. I can't think of any other public SaaS company. And if you consider that SaaS that's higher they should go. If they have a $30 billion market cap, they should go spend 3 billion. Right.

And I think if you look also at Southeast Asia, it's getting very calm these days. No one want to put that much money into something very risky. So you may have more very opportunistic and looks like more IKEA for very cheap price. So you may get those kind of acquisition in the next few months. But very large one. No one is with so much troubles to run the company these days. The public listed one want to take that much risk, especially anything above half a billion or a billion. Very few are going to take risk to go there.

Yeah, mostly like the thing. I mean, so valuation multiples are lower for M and A and we can bring it up, but at the end of the day it's like there are different types of buyers, but it's all rational. Like public companies can pay a higher multiple than what they trade at, but not that much. Unless it's a game changer. Unless it's a game changer. Right. PE firms can pay higher multiples than public companies are trading at, but not more than 20 or 30% the vistas and insights. And tomorrow they can't pay much more than 20 or 30% premiums, 40% because they can't see that they can make money. Right. So it all just comes down proportionately and it's not even that big a deal. The bigger issue is just a lot of it is just stopped. Right. It's just stopped. Like M and A. It sounds silly, but M and A has to boom when times are good and it has to be calm when times are tougher. It's just, it's counterintuitive to all the brilliant people on the Internet looking at spreadsheets, but it's. We're human beings, right. We're. We're subject to externalities. So. All right, more stuff to come all day. We've got so much great VC content coming. But let's break today. I think we've got like three other. I don't even know what's on this channel. We got a ton of sessions and I'll. You don't have to come to my kickoff. You've heard enough from me. But I'm going to dig in a little bit on this and on multiples a little more. If folks weren't bored of that topic.

That'S not the one I'm I'll run a session here at 4pm with GGV vertex and square Pig and we're going to discuss about Series A.

So if you that'll be All Star. So yeah, if you want to do more Venture and you do nothing else today, come to the come to this 4pm one that's probably right in this room. So thanks everybody. Let's have a good day today. Appreciate it.

It.