VCs are Looking for It All in 2023

I want to invest, I want to invest, but there's no companies. And then I'm going on Twitter and the companies are saying, are any VCs investing? And I just want to understand how do you see where we're at today? Especially when I see what I just said there.

I've been investing venture since 2013. As you know, we met fairly early in your career. And I bolted out of the gates in 2013. Right. I did Pipedrive, talked to us, Algolia, Greenhouse and Salesloft, all within 12 months. I did almost no investing the last 12 months. And some of it, certainly the macro, I mean, boy, the markets changed a lot 12 months, didn't they? The world changed. But it is, I will say, and I will say I do think it's harder to find good deals. And I think it is true. And I think people are a little bit full of it on the Twitter, right. And on the social media. And there's probably a lot of it going on. And some of it is just that, like we just, we all have to reset, which is that we all took so much risk for two years and the markets were so strong that we're resetting to a day when we're looking for so much more out of an investment. The bar's gone up and they are harder to find. But I think that anyone who's. I agree with you. I look at folks on Twitter, they're like, yeah, it's whatever, January, something 2023. I've done 11 deals this year. I'm like, kudos, kudos. Because I have not seen 10 times the qualified deal flow of 12 or 24 months ago. I haven't seen it in these times. Right.

Can I ask what has changed in what early stage investors are looking for in the companies that we back?

I wrote this at sort of the peak of the meeting in 2021 when I was talking with someone to Sequoia and they said, they called it the postmates effect. And what they decided is that, I mean, obviously Sequoia is ahead of most of us, certainly me, is that they realized early on when things exploded post pandemic, that at this point now, number three or number four, the market could be worth billions, right? Postmates, like, you know, I used it, but in the US I think it was number three or number four and it still sold for almost $3 billion. And so for ever since I was a founder in my first job and then an investor, we were always looking. You had to be number one, right? And back in the days When I was competing with DocuSign, I almost wanted to jump off the roof if we couldn't be number one in categories. Right. Be number two wasn't good enough. Right. Oh my God. But then we realized there was room for 10 vendors in every category. Right. Payroll, sales automation, or expense management. Right. Some of these products are hard to tell the difference. Right. And you don't have to sweat it because when, when Brex and Ramp and Expensify and Divvy, all of them are worth billions. It changed. Not only did it change the size of outcomes, but it changed the way we invested. We didn't have to decide who was number one. And it was very stressful in the old days, like until 2018 to have to know if they were number one. You'd pass on so many deals. You would pass on so many deals. And I don't think that's. We're back to that today, but we're back to pulling our hair out of realizing a billion dollar outcomes really hard. It's really fracking hard. Right. And, and we got so arrogant in 2021. So greedy. Everyone with their unicorns. I don't think anyone brags about being a unicorn today, do they? Do founders brag about it? It's gone out the window as a term of bragification.

I'm just looking at a lot of founders who are DMing me and they're going, I, I don't get what you want to see. Do you want to see growth still? Do you want to see profitability now? Do you want to see margin improvement? What, what do you want to see at the early stage so I can focus my efforts? When you hear that, where do you go at that?

Let me step back for a minute. I think the key to success in SaaS and B2B investing, that I only do and you do a lot of it actually hasn't changed that much. It's that Somehow, somehow in seven to 10 years, you've got to get to 100 plus million in revenue. Okay. You just have to. And really today it probably has to be closer to 200 million because that's when you can really IPO, right. Approaching 200 million. So you've got a decade to get to 200 million. Like there's you, there are certain rates that you just have to grow and whether. And, and Niraj from battery simplified it all for triple, triple, double, double. Right. For me in, in the old days, it's like, you know, can you go from like 1 to 5 and 5 quarters or less that will also set you up. That was, I guess that was a 5x. But the math has to work in founders and the only thing that's changed is the amount of capital you're allowed to spend. Right. In the old days the rough rule is we could raise including A, B, C, D, E, F, G, H, I and J rounds, you could raise 100 total, right. Then that kind of grew to like 3 or 400 million as the IPOs got bigger at the peak and now we're probably back to 100 million which is everyone has to be capital efficient in a way we forgot how to be. And so VCs unfortunately are looking for the trifecta. They're looking for top tier growth, but also some sort of top tier quartile capital efficiency. And even at, you know, even at a million, even at a million of revenue, maybe not, you know, 10k in MRR, but even at a million in ARR, they're looking for this combination. And all the original investments I did, not everyone not benchmark, they all met that bar, right? They were all growing at top decile rates. But we're pretty capital efficient and that's, that's the market today I think. And they're harder to find, especially with founders burn rates and everything where we have not fully reset if we are going to reset to sort of the old day expectations at least.

So I do want to touch on that. I do just want to finish on the postmates effect though because I totally get you in terms of postmates effect. But it's turned out not to be true. That was in a macro environment it.

Was true for two years it was true. There were many exits, there were many cash exits, right? True.

In a macro environment that was kind of artificially inflated by, you know, certain stimulus, by bodies and now it's not true. What happens in a world then when the postmates effect isn't true?

There's two ways of looking at it. There's the, there's the VC perspective and the founder's perspective. Okay, let's step back for a minute. You don't always have to directly compete with someone else in your category. You can, you can own a segment of it, right? You can own the SMB segment or the mid market or you can be focused on E commerce or a different vertical. So categories have more rooms for number one than sometimes VCs realize. Right? That has certainly happened as SaaS and cloud is expanded, especially with vertical SaaS. But it's true, I think you have to have as founders, you have to have conviction about why you will truly win. The competition side finally matters again. Why will you win? And I always knew it as a founder and I think the best founders know it and we need to know. And it certainly alarms me, investing when I ask a founder, why will you beat the competition? And they don't know, right? Or my version of that question is as I ask them, why did whomever stumble? Why did postmates stumble? Why did whoever stumble? And the best founders always have a story and they know why they're going to win. And the almost great founders are like, I'm not sure. I'm not sure why my competitors stumbled. I don't know if that answers the question, but I think you have to be number one. But the good news for founders is there are more number ones, I think in most categories than existed a few years back because SaaS is bigger.