Why Seed is Systemically Broken

Very exciting, Harry. So so great to be here, and so proud of everything that’s happened with twenty VC Empire. It’s it’s great to have been been there on the sidelines since being guest number 50. Dude, I

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one. Yes.

I’ve made two best lists for you. One was the best buy cash back, which we all thought was no big deal in 2021, but the last couple years cash just looked scarce. Two IPOs in B2B in two and a half years, and by NAV, which is what we report to our LPs on paper, what are the best three. And so far, for me, I’m ten years in. I had a little bit of a break for a year. Right? Maybe I should have invested faster. But it’s interesting is and I’ll answer your question.

My best buy cash and best buy NAV are not. There’s no overlap yet. But the best three for cash I’ve done in the number one was Salesloft, which was the last big deal of the 2021 era. It closed, I think, 12/23/2021. HashiCorp was the last IPO, and Salesloft sold for 2,500,000,000 of cash at about 100,000,000 in ARR. The second one was Pipedrive, I which don’t know what that one would be worth today. That was 1,000,000,000.5 in cash as well. And the third one, ironically, was Smaller Harry, which was a company that got sold logical for 300,000,000, but I learned a lot from being multiple times the largest investor.

Right? Because we all brag on Twitter and x how much how or how we were early and this and that. But if you own a tenth of a percent in a fund, it’s not gonna get you that far, is it? How much did you own of Logical when it was bought? I mean, all the entities own 20 some odd percent and it’s cash. So that gets you a good you know, it’s a distant number three on the list, but for me at this career, it still gets you a material return.

Right? Yeah. Totally. That’s a good 60 And million dilution. It’s taken me a decade to understand what folks have been doing a little bit longer say about dilution. It also helped that they stopped fundraising.

No. No. I I didn’t. The NAV ones, I predicted two out of the three. You know, VC’s all they say some variant of, like, you know, you gotta go long. You don’t know how they’ll perform, you know, at the end of their later in life. I don’t really believe that. But when I put the list together, I realized it’s true. I didn’t think any of these things would happen. Salesloft with Kyle, you know, he was one of the most determined founders I ever met in the early days.

Right? And it was a fun one for me because I co led the seed, but then I brought in emergence and insight. And so almost a whole cap table I was able to kind of assemble, which is harder to do today, but it was fun then. Right? There are certain founders they can’t lose. But sometimes you just don’t know where the hell it’s gonna go. And Kyle never quit, but, you know, right after we invested, they had an $8,000,000 product they dumped. So it went from 8 to almost 0 in revenue.

And it was a totally the right idea. Like, no. Today, in my career, actually, it would startle me more than it did back then. Back then, I was it was early. I’m like, that’s cool, man. Like, okay. That’s the right decision. But to go through so many things, to expand the platform, to go more enterprise, now it’s very common. But back then, you know, they and Outreach were so competitive. I didn’t think both could win. I didn’t think both could even survive. That that was wasn’t my life experience in SaaS.

Like, it was more like only one could capture that 60 to 80% market share VC’s always talk about. I didn’t think you could have two folks with 40% market share. I didn’t think it was possible. So what did you learn from that investment? What are the takeaways? The number one thing, you know, when I look at my three worst ones, this is gonna be the theme of the three worst ones. It’s not enough, Harry, but that ultra insane commitment to success is so important. And then having a binary team.

Salesloft chief product officer, Sky Rob Foreman, they were the pair. But if you have a binary pair that is a 110 committed and they can build pretty decent software and sell, that’s rare to have both. And so there’s the magic. The other thing though that is things are so move so much faster today. So in the old days, so I met Kyle, who was CEO of Salesloft very early, but then I started hanging around the offices of a lot of startups and their first product, like, sales team was using their first product.

Like, used to get to spend a couple of months watching something in the field, making a decision. Now you gotta make now you gotta pay 25 pre a demo day in one hour. What I will never sacrifice again is two great co founders. Two great co founders. Numbers are great, but insane level commitment. Like commitment better than me. Like you’re even more committed than me, I think, Harry. I mean, I’m a pretty committed guy. So anything less than that Harry, as an investor, this takes too long now.

We’re like fourteen years IPO. People are quitting left and right. They’re quitting left and right or they’re quiet quitting or they’re settling in for 5% growth. It’s just not worth it as a you can’t make any money in VC, can you? It’s impossible.

If you have less time to get to know people, it’s it’s harder to catch the cynics. It’s harder to catch the bullshit artists. But the main thing I just do is I almost immediately do another Zoom with the CTO. That’s actually the way it’s changed. In the old days, I would do it late in the process. I would I would get to know the CEO. Would talk to the customers. Right? I would go deep. And then at the very end, I’d be like, okay. I gotta talk to your CTO, Harry, to make sure that this is real.

Now I immediately skip everything else. The second call I wanna have is with the CTO.

You’ve done a lot already here in your career that I am, but I have built software that’s done hundreds of millions in revenue. One thing I do know is the difference between great and good software. Okay? And I know the best CTOs. I know and I know someone that is better than the best CTO. So I wanna know, are they a 10 or a five on our on our old logarithms? Are they amazing? Can they build software faster than anyone else in their competitive industry? Better software more quickly.

And it’s so easy when you talk to the best CTOs to to hear it and learn it. It takes seven minutes.

Well, first, do give them an hour, not seven minutes. Right? But what do I do? First, I ask them to do their own demo. Even if the CEO did the demo, I want to see how they think about their product and what they’re excited about. I want to see surprise and delight. I want to see them show me the things they they love. Listen, this is this badass thing I just did with AI. OpenAI can’t even do this. Let me show you, Harry. Like, these guys at Anthropic, they don’t even know how to do this.

Right? This is so cool. Let me show you something I know how to do that the rest of the world doesn’t even know how to do yet. That’s magical.

don’t even have to do that. The best ones are so proud of their product, their code, their work. They’ll show you in the demo. They can’t help themselves. I’m just like, okay, show them. What’s your favorite feature? What are you most excited about? And what frustrates you what frustrates you the most in the product? And if they could they can show you why they’re bothered and why, you know, I can’t afford it and the and the OpenAI API is too expensive or this is broken or the Stripe API doesn’t do what I want and you just wanna hear this magical insight.

And they’ll show you what they’re proud of, the best ones. They’ll show you what’s badass. And the really good ones, just like the best business the best CEOs, asking them about competition is so telling. Asking the CTO what they what what frustrates them in their product is very telling. The great CTOs will answer in sixty seconds. I’m just super frustrated that I can’t get this next level, this next thing out in the API or this next workflow out. I’m really frustrated that we’re behind on our webhook platform.

Whatever it is, they’ll tell you instantly. And the mediocre c CTOs will be like, it’s pretty good. Let me let me straighten my tie and I’m off to another meetup.

I have never met a great CTO that isn’t at the edge of hyper transparent. If I did, I would run for the door. The best CTO’s, that’s the environment they’re in. They’re challenging everybody. They surround themselves with people better than them, engineers better than them. And they’re going hide some secrets. Right? Don’t get me wrong. There’s two or three secrets a CTO might hide, but they’re so technical I can’t understand them. They’re not gonna hide anything that someone can’t figure out playing with your product for two hours.

Why would you hide something that your competition can figure out? Because your competition’s using your product, aren’t they? They sure better be. So and your competition can actually pretty much expose anything that you can see in the browser. There’s only so much you can hide. Right? You can find out your stack. Anything you can expose in the browser and what the product does. So you’ve got to be a pretty weak CTO to hide that stuff. Right? I used to do the CTO like two or three weeks into an investment.

Now it’s literally, can I talk to Jane tomorrow? I don’t even need to do all the rest. I need this binary pair.

Overall, I would say 80% of the time, the CEO is better than the CTO. Especially at the seed or early seed stage, because there’s different ways to, like, get up 10 customers and 20 customers. And the real reason is, at least in B2B, almost every startup that gets to, like, a million, like we’re talking they have what I call a 10 x feature. There’s something there’s something they do better than everybody else. Like, most of the product sucks, right, because they’ve only been around eighteen months.

And they they they haven’t been doing it for ten years, but they do something that the leader doesn’t do well or at all. Right? And so the fact that it’s a 10 x feature sometimes can mask the fact that the software is not that good, especially if you get into more vertical SaaS or areas with more bounded competition. And those ones tend to get swamped as you scale. They the growth decelerates at 10 or 20,000,000 as, like, a cool 10 x feature, but not the ability to iterate faster than the competition.

The competition swamps you three to four years down the road. Up until a million or 2,000,000, a 10 x feature plus a CEO can win. And sometimes that CTO is okay or not that committed or might quit or whatever, and that 10 x feature never becomes a 10 x platform. But will you still invest if this is No. No. Because, listen, this takes us a while to figure out, Harry, like, you know, we can’t even make money on a billion dollar exit unless you own 20 something million like logical.

Like, dilution’s so high as a seed investor. Let’s put aside an opportunity fund or SPVs or other things. Let’s take a traditional seed fund. Okay? Really, in today’s world, you’re going to suffer 50% dilution on the way to IPO. That core seed fund that you struggled to get 12% of, you know, it could be six by the IPO. 6% of a billion dollar m and a is only 60,000,000. You know, it’s funny, I’m coming around after eleven years of investing, Harry. I’m coming around. When I started, I didn’t believe you could make money in venture.

Even though my first five investments all worth a billion or more for real, real billions. I didn’t believe it. I believe that they could each do five x, okay, which I thought was enough, but I didn’t believe the funds could make money. Then we go into 2018, 2010, and start to believe, hey. These funds can make money. And then 2021, I’m like, this isn’t easy. Now I’m kind of in a mode now where I’m like, I got some decent investments, but it’s hard to it’s hard to make money and venture again.

Right? So you gotta have $23,000,000,000 exits, especially if you’ve had some success in this world. If you wanna make a little bit of money and drive a, you know, whatever, a Mercedes with your fees and and enjoy the high life, yeah yeah, there’s a lot of ways to make money and venture. But if you wanna make a 100,000,000 or more, there’s only a handful of ways to do it.

I used to. I remember the very, very first investment I ever wanted to make, I had known the founder from the old days. Right? And it was one of these ones that when you start investing, you wanna do. They were like, even though I was doing seed, they were like at 3,000,000, growing pretty quickly, not burning a lot. It seemed like low risk kind of investment. Sometimes when you start, you wanna do it. I go up to San Francisco to the office, and the first time I sit down with the VP of sales, I’m like, how are sales going?

He’s like, actually, this is my first time I’ve ever done sales. I’ve traditionally done product. I’m new to sales. The last two sales folks quit. Okay. That’s a good sign. He’s like, how’s the pipeline? He’s like, terrible. So I quickly learned to interview the whole management team. Having said that, fast forward to, you know, a a few more investments in. Even though I want to do late seed, which I think is what you would prefer, that’s maybe where the overlap of our investment styles. These days, they don’t have a management team, so I don’t care anymore.

I don’t care anymore. I just care about the CEO and the CTO. And me, the CTO is great and the CEO is great. I really don’t care if the one sales guy they have is good or if the marketer they have that just does clips is great. I used to care from that story, but if I’m investing in someone with 10 employees or less, I don’t care anymore what the management is. The CTO is the one I care That’s my changes over time.

Just ask Columbo style questions. Just ask open ended questions. I mean, you’re good at your you know, you’ve done 1,384 podcasts, so you’re pretty good at the open ended questions. You know, show me a demo. You know, what do you love? And then the other great question, what are the top feature gaps? This is the next question asked. What are the top few feature gaps you have? Just ask. What are the feature gaps? Well, if they tell you none, you’ve got a pretty crummy CTO. If they’re like, you know, Toast has this and whoever has this and we gotta do this and our and our POS is terrible and I’ve gotta integrate this, you just wanna hear that.

You’ll you’ll see the same magic you see in any executive once you’ve done 15 or 20. And you’ll see you’ll see it tomorrow to start. You’ll see it tomorrow. Just don’t lower the bar. That’s the mistake so many founders make when they go out to interview a functional area they’ve never done before. I’ve never hired a VP of vendor sales or marketing. They get excited that that they worked somewhere great, that they worked at Datadog. Throw it out and just just listen. You’ve interviewed almost 2,000 folks, Harry.

When you talk to the best of anything that’s great, the best plastic bag manufacturer, the best bug manufacturer, They’re the best, and it’s the same is gonna be true with the CTO. Just let them delight you. You just want your jaw to drop ten minutes in. You’re like, wow. This took me a while to figure out, even though it’s obviously true, is, yes. Even by demo days, certainly by a million in revenue, the best CTOs have built great software. I’m looking for signs of crappiness. I’m looking for corners cut.

I’m looking for software that’s too slow at a million in revenue. If the dashboards take twenty seconds to resolve at a million revenue, what’s gonna happen when you have 10,000 times more customers? If it breaks during the demo, if things don’t work, anything, people kinda light me up or or and I actually kinda got hazed on hacker news the other day for this on the business side. But when I see these signs that the software isn’t good at a million, it rarely gets better at 10.

It gets worse. The load goes up. The workflows go up. I’m not expecting this to be jaw dropping, but I’m looking for one little bit of beauty. And if if that’s broken or or has tons of issues, I I’m just out. Right? I’m definitely out for slow.

Yes.

Yeah. You know, I hate it too for the reasons I think you hate it. But two things. First of all, I believe and I know probably 90% of investors either don’t believe this or say differently. I believe the best opportunities find you at the end of the day. It’s not that you don’t find them, but they also find you by the same token. And if you’re going to pass on an amazing binary set of founders, an amazing CEO, CTO, just because they’re in a competitive space, you’re gonna lose.

You’re gonna lose the ripplings and and the gustos and the deals. You’re gonna lose Datadog because you’re gonna say, you know, New Relic owns the market. You’re gonna lose these deals even though there’s some logic to it. Right? So that’s my first thing. Yes. At the margin, I’m out. Okay? And we just talked about a sales productivity tool you invested in with jaw dropping numbers. Okay? I’m out on that whole category because there’s 200 vendors, but it’s probably an error. You invested in a great company.

See? So I’m with you. I don’t even wanna take those meetings because there’s too many vendors, but you just gotta take them where you find them. That’s one. And secondly, and this is just annoying VC math, but it’s true. You know, big markets often, not always, but often have more competitors. So if you get too obsessed with having one competitor, you can end up investing in something that’s just a small market. It’s not always the case for sure. Right? But you’ve got to be careful you don’t take that too far.

And then the last point is, this took me a few years to see even though I knew this was true from the beginning of investing, for hyper agile teams. If you have the best engineering product team in the industry, having a a lot of competitors is a positive. Because they help grow a large market, and you keep each quarter, you pull away. Each quarter, you pull away, and it becomes a net positive that everyone’s investing so much money to educate the market to grow the market.

But if four years down the road, your product is 40 times better than theirs are, you you pull away. So there and it’s complicated. Right? But I don’t think it’s as simple as running from competition. When I’ve done that, I kinda regret it. Right? I kinda regret it a little bit. And the other thing that happens if you run from competition, especially sometimes in vertical SaaS, because you can find a lot of categories in vertical SaaS where the competition is SAP or Excel or paper or, like, some DOS application from the fifties or something like that.

You there’s plenty of good ones there today, but sometimes those hide a mediocre CTO or sometimes there isn’t even a CTO at all. I And don’t wanna do those investments. I’ve done a few deals where the competition was SAP or Excel and they get to millions in revenue, but they got there with a product that was clever but, you know, did three things and four years later it does six things. I want four years later doing 3,000 things. I want this exponential compounding of of software functionality.

Almost 10%. Five co founders is is too many, is one learning. Now you can have 12, but I think five making decisions is too many. The other interesting thing was, you know, they did they had a lot of changes and there was a lot of CEO changes and a lot of cap table changes. That one today, you know, it’s tough. I mean, they owned a segment that now HubSpot has just taken over. And this is what happens if you get extreme product market fit. Pipedrive was my first investment ever in 2013.

And even in 2013, I remember going on, I don’t know what website, there were 20 SMB CRMs that all looked the same as Pipedrive. They were all Trello clones with Kanban cards, and they all looked the same. Now Pipedrive was slicker. It was faster. It was slicker. It worked. But most importantly, even though it was at a million when I invested, it was already breaking away. It was at double digit growth. Right? It was growing more than a 100%. So it wasn’t that complicated an investment at the time.

Right? And the product market fit remained insane, but I don’t think the product has changed much in eleven years. And then HubSpot comes in. I I met the HubSpot founders early because they were wanted to get into CRM, and they knew I had invested in Pipedrive. So that’s actually how I met Dharmesh at first was talking about Pipedrive and, you know, were there synergies with with HubSpot back in the day and all that? And they decided to build themselves and a clone. And, you know, for two years, it was free.

Right? Their product wasn’t even that great. And now it is the biggest source of growth at HubSpot. Right? CRM is at 700,000,000, I think, and it’s growing faster than marketing automation. So they won this thing, but they weren’t able to get to that next level. And it is very interesting that HubSpot won that market in the end. Right? They won that market in the end. Not that Pipedrive, Vista won’t make some money off of it. So there’s some timing stuff in these Best Buy Cash. Right?

There’s timing, and that’s what makes venture stressful. Right? We all wanna hold forever. But one lesson from this one is maybe don’t hold forever. If the founders are gone and this is the other thing I believe, Harry, and I know many most VCs disagree with me, but when the founders leave, I’m pretty much out. It’s not that I’m not a fan. I’m a fan. I’m I’m gonna be there. But I would like to sell when the founders leave. I would like to sell. Always? Always. Because I know everyone thinks Frank Slupin was so great, but he left.

He left when times got tougher, didn’t he? You know what happened when growth finally slowed at Snowflake? He stepped down. But a founder wouldn’t have stepped down. The founders never leave, you’re a founder forever. So I know a lot of people like to bring in professional CEOs and believe in this, and some companies need that you need it. Right? And maybe if you bring in a professional CEO and the founders are still running the company, that that you have that DNA. But what I learned from Pipedrive is when the founders are not there, you lose this competitive agility when it’s being run with knobs and dials.

Right? So that’s the venture learning, which is, for now for me, right or wrong, if the founders leave, I will liquidate my position as soon as it’s significant. Right? There’s no point in selling early. Right? It’s another life lesson.

Given today’s multiples in today’s world, yeah, I think they’ll lose money on on on these deals. Right? Well, there’s a micro question and a macro question. The micro question is, just like LPs are coming around to giving VC’s mulligans for their 2021 funds, are they gonna give PE funds a partial mulligan? Right? Are they gonna give PE funds an okay if they do a one x, on some of these deals? Right? If PE gets a mulligan for these bubble deals, right, then it doesn’t really matter.

Right? If they if they have to sell all these deals for 50% of what they paid, but the LPs have moved on, we’ll all kinda quietly quietly forget about it. Because that’s what’s happening in venture. Everyone’s getting a mulligan. Everyone is getting the LPs have decided they just there’s no point in being a critic for your 100 x deals in 2021. We’re gonna more be a critic for your 100 xAI deals in 2024, but the 2021 deals are, are behind us. So I don’t know. If they’re held to the same standard, it’s gonna be brutal.

And it also shows, you know, there was that thing that Bill Gurley said about how important timing is for exits, right, and how important 2021 was for exits. And Slack selling Slack selling for 27,000,000,000 at 1,000,000,000 in revenue. You know, what would Slack be worth today at 2,000,000,000 in revenue? Maybe it would be worth 12,000,000,000, right, at twice the revenue. And so there’s timing here. And when you hold on to your NVIDIA shares for thirty seven years, these are these are interesting questions. Now they’re all competitors.

Yeah. They raised it 7,000,000,000 in their last round.

You know the you know what the other learning from that one is? What? This is a VC ism that it turns out it’s true. If the founders say to sell, sell. So Kyle was sure there was actually this was 2,500,000,000 at the end of twenty twenty one. You know, that was an early investment. I wasn’t on the the board at this point or anything, but I was on the sidelines. It was it was mixed whether folks wanted to sell or not. It it was mixed. The goal in 2021 was to play another card, wasn’t it?

Why why sell at 2.5 when 5,000,000,000 seemed easy? That’s where you make money in venture is that last card. That’s where you get the big multiple in your fund. Right? So Kyle had to push it through. He had to push the sale through. He’s the kindest founder I’ve ever invested in, it’s a reminder that you can be kind and win. And, but he pushed it through. He said, listen. This is there is no argument that this is not the right thing to do for the company.

Like, to get here post dilution, post IPO, post everything, this is the thing to do. And so when founders say that, just like when the founders leave, I’d like to quietly exit my positions. When the founders say to sell, I’m no longer gonna talk them out of it or even play devil’s advocate. I’m just gonna tell them, I’m sure you’re right.

Not even distribution helped them, but it’s very interesting if you listen to Darmesh and Brian. They had some distribution. But remember, back in the day, it was a single product company selling to marketers. The distribution to sales professionals was very adjacent. It was attenuated at best. Right? And I had a long conversation with them just on this point. I remember at SaaStr annual when they came together, and they’re like, yeah. Like, people thought it was crazy. Like, it’s not the same buyer. It’s not the same ICP.

But here’s the the a bunch of learnings. One of it, and this is how I met them early, like, if you have a founder led company and a bigger company is gonna do this, like, this is a top this was our top priority beyond marketing was to do CRM. It might have might have been a dumb idea because it was a different buyer. It was a different time. But they were willing to invest multi years in a free version, a decade in doing this because they knew it was the right decision.

If it’s founder led, be wary. Be wary. That’s what Olivier has done at Datadog of decimated multiple categories because it’s a founder led company, and he comes in and says, we’re gonna own these categories. We’re gonna keep owning a product after product. Then they don’t win in everything, but that’s why, you know, a huge percent of data company customers buy eight products now. Those are the ones to be wary of in the competition. You think that the big companies are slow and agile, I mean, and dis agile, but it’s not always true, especially if they’re founder led.

It’s not it’s not always true.

Yeah. I’ve thought about this a lot. I think it’s actually fairly straightforward. As you approach 10% market share in your core ICP, your core market, you gotta expand. You have to expand because at some level, slows as you cross 10% market share. Like, you can’t get to 200% market Here’s the disagreement. Now going from 10 to 20 may happen relatively quickly. You’ll only see it in some of the metrics. Deals taking longer to close because you already got all the easy ones. Right? But I always see something as folks class 10% in their core ACV.

I always see something getting harder. And you have enough time at 10 to be implementing your second act calmly. And founders don’t see this. This is a tiny way I try to help them. When I see this happening, I’m like, okay. Let’s break it down. Who’s your core buyer? Well, it’s restaurants in the South Coast Of France between two and four, tables outside. Okay. Great. I get why you got that. How many of them are there? 3,000. Okay. How many customers do you have? 250. Okay.

Okay. Guys, we actually have a risk that our growth slows in twenty four months because we own this market. What are we doing? There’s the Parker Conrads that solved this problem on day zero, albeit with hundreds of millions. But I find more founders these days, it sneaks up on them. They’re so focused on the minutiae and and scaling and building that management team that they they skate. They don’t have that second act as they cross 10% market share. Now it doesn’t always have to be a second product.

It it’s at the early days. It could just be growing your ICP much broader. Right? It could be going more enterprise, might quadruple your market size right there. Right? Going going to another country, going to The US. So it’s not always second product, but you need another act as you get to 10% market share.

My worst loss is 5,000,000. Then I have another one where I’m gonna lose 3,000,000. My worstest loss, I realized, was a company where I made five x that sold for a 100,000,000 right when lockdown happened. Why did they sell at a 100,000,000? Well, he was making a mistake that I see so many unicorns made the last twenty four months, is he got himself into a pickle. He hired a terrible CEO who hired 25 terrible sales reps. We went from five reps and a VP of sales who he immediately fired the CEO and brought in 20 people plus himself and they did half the sales of the VP of sales plus five.

Okay? And not only did sales go down, but what happened to the cap the burn rate? It obviously went way up. And so rather than deal with it, he let it go for four quarters, five quarters, six quarters because he’d raised a bunch of money. And then you’re just in this pickle. Right? How do you get out of this pickle, this high burn rate pickle, and sold the company? But it was not much smaller than a competitor, which has since IPO ed and, you know, today is worth they were really pretty close for a while.

And today is worth 20,000,000,000. So you look at those ones where you were winning in the market, where you had competition, you’re like, what? From a venture, what’s the what’s the lesson learned? And so I don’t know if that’s the worst because you made money, but, I wish the founder had not been so stubborn. And I see this a lot even with and this is a very I see this a lot with smart founders that are too stubborn though, as they just stick to these bad executives and bad decisions for too long.

They just stick to them for too long.

Well, okay. Here’s a really interesting I reflected a lot on it. This is a mistake I think a lot of us a lot of folks are quietly making even now. I lost it on the third check. What actually happened? This was my one where the the signal was that the CEO misrepresented some some of the financials. Not Sam rankman fee level or Theranos level, but just enough that it crossed the bullshit line. Just enough that it crossed the bullshit line. I ended up still writing a third check into the company.

The first check was small. The second check was a supporting check. And the third check, they just started to grow like a weed in 2021 like everybody did. Right? It it exploded. But there are a lot of issues with the company even as it, you know, started growing double digits each month. And from a venture perspective, the right thing to do is just not have written the third check. We were all geniuses in 2021, and we all had extra money to invest. And it all made sense to allocate a certain amount of capital per investment, but I should have lost a million and 0.5 and not written that third check or 2,000,000 instead of 5,000,000.

Yeah. Or or possibly tripled down depending on how you look at it. That was the mistake. Yeah. I did it intentionally, but I did it reflexively. I I probably probably made a lot of mistakes. But I think the mistake a lot of folks I’ve seen in venture in my own portfolio is there’s zero diligence for these checks. None for these follow on checks. Right? As long as the top line looks good, no one ever checks anything below the top line. There’s no diligence, no customer calls, no nothing.

Right? That’s the conundrum with the follow on checks is if you treat them as seriously as the initial checks, then I think that’s the right way to do it. Right? But VCs don’t. Okay.

My third one is the bank account. I used to do all these customer references before when I had three months. I used to leisurely get on the phone and do and I just saw you said you did 15 in one day. I’m I’m proud of you, Harry. But I can’t do 15 in a day and it takes me a while to do customer diligence the way I do it. So I’ve resequenced it in order. Right? Now I assume the diligence will be tolerable. Right? And I’m upfront in the timing.

Right? And now I’m quickly after my losses. Now instead of doing financial diligence at the very end, you know, just to check the box before I wire the buddy, now I do it in the beginning. So I wanna just make sure there’s no shenanigans. I want my accounting firm, the auditing firm I’ve worked with for over a decade, to make sure that the financials in the bank statements are close enough to accurate. I want about 90% accurate. I’m not expecting you to have a CFO or a CPA or a CFA or I I I’m fine if it’s wrong, but what I’m looking for is bullshit.

If I look at the investments I’m most stressed about and and frustrated with, it’s where there’s any bullshit in them. I don’t think the best founder is bullshit. I think you can build a unicorn bullshitting, but I don’t think the best founder is bullshit.

I don’t think I have heavy fraud. Right? But I think this $5,000,000 loss when you when you take twelve months of revenue and you recognize it all in one month, that’s at the edge of fraud, isn’t it? That’s why I like this this quick bank statement check. Like, okay. Go through it and just make sure that the expenses and everything it sounds silly because it doesn’t really matter when you’re making a seed investment, whether there’s 200 k in the bank or a million. It doesn’t but what does matter, I find, is when we’re investing faster, Harry, and we’re investing broader, I just don’t want any shenanigans.

I just don’t want it. Life is too short. I don’t want any manipulated metrics. And the problem with these bullshit artists, Harry, is they’re bullshit artists for years. It’d be one thing if it one and done if they just bullshit you and the financing, but then every investor update’s bullshit and every board meeting is bullshit. It’s just an endless stream of bullshit and you can’t make it’s not worth it.

I feel guilty too early about asking for customer references if I’m not 90% sure I wanna invest. I still feel guilty about that. I still feel guilty about burning VC shit don’t care, but I feel I felt uncomfortable as a founder. I only raised a couple times burning those, you know, oh, you wanna talk to Dell and Comcast and LinkedIn again. The third guy that then doesn’t invest, it’s just like so I try to actually do things that are quick, and then I view those customer calls as a real ask, as a favor, and for real.

And so I’m hoping they mostly confirm what I believe to be true. I’m not looking for a customer call to turn a frown upside down. I’m not looking at to take a marginal investment. This is, I think, what VC’s used to do in the old days, is they’d hope. I’m I’m looking only for confirmation with customers. If you’re at a million growing 10% a month and your churn is low, I’m gonna assume your customers are mostly happy and they’re gonna gripe about a bunch of things too.

Okay. So we’re at a million.

When I’ve let the growth bar go down just a little bit, I always regretted it now.

be, at the end of the day, the best investments still and this is brutal. The best investments go 1 to 10,000,000 in five quarters or less, the very best ones. You can’t IPO unless you triple, triple, double, double. You know, when I started investing, I remember putting it on the whiteboard, trying to figure this out. And I invested in Pipedrive, and I’m like, okay, they’re growing 8% a month at just over 1,000,000 in revenue. I’m like and I was asking the other VCs I was working with, like, is this good enough?

I actually didn’t this was a long time ago in SaaS. I didn’t know. No one actually knew. But I’m like I’m like, okay. 8% is my new bar at a million. It’s gotta be 8% a month because I one, that I was growing 6%. So I’m like, okay. It’ll be it’s better than me. And two, I don’t see how they’ll ever get to a 100,000,000 before I’m in a retirement home if we’re not hitting these numbers. And that 8% ultimately, you know, we we really want 10, which is what I where you fall out of your chair is when you, you know, you see that double digit growth at single digit millions.

Right? That’s when you fall out of your chair. But this basic VC math of triple, triple, double, double is annoy as much as it annoys founders and they say, well, it’s harder now and how can I do triple triple triple here? I I only raised 6,000,000 or I can’t raise a series g or series q. The IPO markets don’t care. They actually don’t care whether you raise nothing, right, in primary like Atlassian or whether you raised a a crap load like Rubrik or whether you raised almost nothing like Klaviyo, and then a bunch the IPO markets don’t care.

They care if you’re efficient, the weak UIPO, like the two quarters. They don’t care about the past, do they?

For venture, I think people are full of s. I think everyone wants a whiz. Now we know it’s possible. But the truth is, if you’re in the zone today, if your growth is good enough, what has happened is, like, there was, you know, in 2021, if we had a pyramid, this many folks could all get funded. Right? For, I don’t know, half the pyramid could get funded because everyone was growing at triple digit rates. Right? Now it’s a much smaller segment of the startup community growing at triple digits.

So actually, what I’m seeing is they’re flooded with even more capital. They’re flooded with even more capital, the outliers, because there aren’t enough of them. There’s just as much capital chasing fewer and fewer folks that can grow at triple digit rates. The way I’m seeing in my personal portfolio is, and this is so different than 2020 is, talking about pro rata, anyone in my portfolio that is growing quickly, the insiders flood it with capital, Flood it with capital. In a way I’ve never seen in my whole career.

Everyone used to be risk averse, and then they wanted Tiger to do it, and then they wanted SoftBank to do it. Now, the the big funds, the $10,000,000,000 fund, they just they don’t wanna share to leave the cap table.

To all take all this insider money?

No. It’s a it’s a complete negative. It’s a because they do less work, and they have a different bar. Right? Because if you’re managing 10,000,000,000, and you’ve got a $5,000,000 stake or $10,000,000, and that company is just it’s just in the top decile of your portfolio. It’s not whiz, but it’s in your top decile. What are you gonna do with the other 9,000,000,000 you haven’t deployed? You’re gonna put it into that company. And as you see that other people wanna do it, you’re gonna get your elbows are gonna get sharper.

And then you’re gonna realize you gotta do it with secondary. And then you realize, you know what? The deal’s only 200. But if I offer 300, like, I wouldn’t do it for a new investment at 300, Harry, but I already invested at 20. So what’s the difference on a blended basis? Like, it’s like, I I’m gonna make money, aren’t I? Because this is a billion dollar company. This is gonna be a $3,000,000,000 company. And so it inflates valuations. Companies are getting overfunded at inflated valuations by insiders today.

I see it left and right.

So many companies had a bridge round. Right? A true bridge round. Like, you just get it wrong. I had I had one as a founder. I needed an extra 500 k. But taking a company that’s struggling and putting tons of money in through safes or debt or whatever, how many of these have turned around and been $10,000,000,000 companies? How many of the how many of the leaders in cloud had like a year and a half or two years of 8% growth, then investors put another 60,000,000 with safes, they turned it around, and people made money.

I mean, I feel like they should be written off.

I would have thought that if you asked me eighteen months ago or even twelve months ago. Two things. First of all, I’ll take a very recent example. Like Model N, was growing like nothing. Okay? It’s a public company in in revenue optimization for pharma. Okay? It had the problem is it never expanded its niche. It’s kinda like contract revenue management for pharma, and it grew pretty nicely, and now it’s not growing at all. It just got bought out by Vista, our friends at Vista again for 1,250,000,000.

Is that, like, a great outcome or something? I don’t know. But, like, first of all, all of these companies, as things swing back even a little bit, they’re all targets for PE. They’re all tar whether it’s Zendesk before at 10,000,000,000 or model n and what this is a good price for model n.

I don’t know. Certainly, you can see like, I mean, we started the conversation with Salesloft. I mean, Vista combined them with Drift. Right? So I I don’t know what Drift was doing. It was doing a 100,000,000 when they got acquired, even if they’re struggled a bit. Let’s assume you bolt on another 100,000,000. I know we make fun of these bolt on combination things, but maybe they work. Like, it doesn’t have to be perfect. Right? Maybe this financial maybe there’s a lot of financial engineering. I don’t know for sure you could talk to them.

I just don’t I don’t think there’s any dummies here. So I don’t know the answer. The other point I will say, know, you talk about zombies, but some of these zombies are approaching 40% operating margins. I don’t think it’s fun to be running Dropbox today. Okay? I don’t I don’t think it’s fun. I don’t think it’s anything like when Drew started. But they’re approaching 40% margins. If they decide they wanna run this as a cash engine for a while and then slowly reignite growth, it’s so profitable at scale.

I don’t know. I don’t know. I mean, Squarespace just went private at 7,500,000,000, right, at at 20% growth. It was in the middle. Will will they come back out of 15? I don’t know. I don’t know. It’s easy to be cynical about this stuff going to our early conversation. Like, I didn’t believe you could make venture in ’20 money in 2013. I’m starting to get nervous again in 2024. But I think there’s logic to this, and it doesn’t take multiple expansion in the public markets. It doesn’t take much growth reflation for these deals all of a sudden to be great deals.

If multiples go from six x to eight x, if you look at what Y Combinator said from HubSpot just a couple weeks ago for this quarter, she said, it is not any easier. Even though they’re growing 23% at 2,500,000,000, she said, listen, it was briefly easier in December, Q one was brutal. It is as hard as it’s ever been. Like, we sell to small businesses and we gotta sell to the CFO and do demos. We didn’t use staff do demos. Like, it’s hard out there even at their rate.

But when it does turn, like, all these deals may be decent deals. Like, they may be 20% that’s what you gotta do is 20% net IRR. Right? That’s the goal here. Right? They may be decent deals. And I just remember I know I’ve done it in a while, but when things were really crappy in the 2016 downturn, I might be getting my timing off, and LinkedIn panicked and sold to Microsoft cheap. Right? And then Marketo sold to Vista for 1,000,000,000, and everyone said they they never could make money.

Right? And they ended up selling for 4,500,000,000 and all of that. It took some market reflation. If you’re in a segment of SaaS that’s in a downturn, we’re going into the third year. 2016 was one year. This is three years, so it’s tough. If you make the right bets and things just go up 20%, you can make a lot. That’s a lot of leverage. That’s a lot of leverage when multiples go up 20% and growth grows up 20% more. It gonna make

It’s tough. Well, look, let’s break it up into two. For enterprise, I think if your NRR isn’t north of a 110% by that point, don’t invest. Don’t invest. You have to have triple digit NRR. It’s just the way it works. It’s even harder to break into the enterprise than the SMB in some ways just because sales cycles are longer and it’s more complicated. If you’ve somehow gotten to a million in revenue, you’ve solved a niche but big problem in the enterprise. Right? They’re gonna buy more of it from you if you solve more of their problem.

I’ve never not seen triple digit NRR at that scale. I’ve never not seen it. Never in my in my career. My own experience as a founder or any company I’ve invested in, it’s always triple digits in the enterprise. Just something’s fundamentally broken if it’s not triple digits at a million. Now SMB is the tougher one. Sometimes when Darmesh and Brian talk about HubSpot in the early days, they’re a little and and Darmesh is an engineer. I I hear a little bit of confusion on what the monthly churn was.

Was it three or 4% or 7%? Three or 4% is what we see with a lot of very small businesses. We’ll churn three or 4%. Credit cards expire. They go out of business. They change things. If HubSpot really was seven to 8% and then got to a 100% NRR, that’s 110% at the peak. That’s that’s mighty impressive. But, if the churn is anything more than a two three or 4% a month, it’s not even software anymore. It’s some sort of consumer like thing that does not have recurring revenue.

There’s a fundamental question, Harry, which is, do we even have recurring revenue here for companies? Right? And at the end of the day, you’ve gotta get to a 100%. Right? Darmesh and Brian agree. Everyone agrees you’ve gotta get to a 100. The question for SMBs is, can you tolerate three to 4% a month churn, which is endemic for small businesses for a couple years? That’s the venture question. And I’ve passed a 100%, if you want to tie it together, I have no regrets here. I have passed on every single company that had, for their segment, abnormally high churn.

A 100%. I’ve gone back to so many founders that were at a million with seven to 8% churn. I’m like, you have something, but it ain’t SaaS. It’s not SaaS. Right? It may be something that may be consumer. Maybe that works in a bento box to your house company. Our whole fundamental model in software, it all breaks if you don’t have a 100% retention. It all

a couple of First of all, I do think that even for startups, an l four m model is great. Take the last four months and average almost any metric. Even as you’re approaching a million, I find it highly predictive. I find if you take the last four months of growth and and average it, that’s gonna be your growth the next eight to nine months. I find if you take the churn, that’s gonna be your just take the last four months and average it. I find it incredibly predictive.

And and burn burn, churn, and growth. It’s highly predictive. And that’s why, you know, when I started investing, I I do love their model. I would take their their historicals, I and would just build my own doing an L four m model was always right. It’s always been right doing an L four m model. So that churn is high that you’re describing, and there is a difference between small businesses and very small businesses. Very small businesses do churn three to 4% a They do. And you’ve got two choices in that environment.

You can either do what, like, Ben Chestnut did at Mailchimp and just be hyper efficient and say it is what it is. If you’re profitable, if your CAC is zero, you can survive a 4% a month churn, if your CAC is zero. It is unsustainable in a Salesloft model. That’s the line. And so can you bet that a Mark Roberge will come in like at HubSpot and help you go mid mark mid SMB and figure it out? The best founders will figure it out, Harry. They will figure it out.

But anyone but the best gets stuck in this three to four to 5% churn rate, and they never dig themselves out. And even worse, sometimes they obscure it with capital. Here’s where VCs can make it worse. They obscure it with capital. The the other thing that happened with SMBs is actually you can grow faster in the early days in enterprise because you acquire the customers in a week or a day instead of in a year. So sometimes the growth top line growth rate is faster with SMB in the early days, and it can obscure that churn.

That’s that’s the ones I think you either have to pass on or truly believe the founders have a strategy to get into that 100% NRR.

The deals I regret are the worst deals. The one that was only five x for a 100,000,000. We also never fully solved the SMB churn there. We brute forced it with capital. Right? It was very SMB, and it had like 2% churn a month. And when the team was efficient and we were burning a 100 k a month, was no big deal. Like, it really at some level, there’s always time, right, to go upmarket. The question is, is there enough time and is there a plan?

And it was tough at HubSpot, and it was very tough at Toast. If you read Toast, it was brutal for them to get to a 100% NRR. Here’s the other truth Harry, is one, in some ways you probably have to be better at SMB than enterprise because the margin for error is lower. You sign an enterprise three year deal, know, and they don’t even deploy for a year because there’s business process change. You get like a whole another year to fix it, and then, you know, you’re gonna work on the renewal in year three.

These SMBs, the smallest ones are brutal. Like, they’ll look at their credit card statement and they’ll cancel everything the day that the fifteenth or the thirtieth of the month that doesn’t make the money. They’ll cancel everything. It’s brutal. And for the best founders, it makes you even better. And that’s actually why I think the best software in the world are are the Canvas and the Squarespaces. Maybe Canvas has better metrics than Squarespace, but they have to be great or I’m just gonna churn tomorrow. It’s almost impossible to churn out of of most enterprise products.

So it has to be software has to be better. It has to be self serve. It has to be PLG. It’s not a choice. It’s a requirement. And do you believe they’ll get to a 100%? What’s their strategy? And if they don’t, if the burn is low, I would take the risk. If the burn is high, would assume the burn will increase linearly with that churn, because it’s just gonna suck up more and more capital.

You know, there’s the burn ratio, right, that David Sachs popularized. And I’ve watched different companies. I don’t know how often you get in your investor updates. I probably get half my investor updates get the burn ratio. Then I started to see its flaw. The burn ratio, David Sachs is basically one or one or less is really efficient. Right? If you burn less, then your revenue, your bookings, it’s super efficient. That’s great if you’re clear the next round’s coming in, and you have like a 120% NRR and 80% margins.

If you’re not clear the next round’s coming in, your NRR is SMB, so it’s 60% or 70%. And maybe your gross margins are lower if you have a hardware component or other COGS. Your burn ratio may need to be much shorter. You know, because when you look at our friends in B2C, they talk about going profitable on a customer in sixty days, ninety days, thirty days. We had Jacob from RevenueCat do our you should do it sometimes. We had him do our little workshop Wednesday, and they have 10,000, you know, consumer SaaS companies on their platform.

Right? They have a 60% annual churn rate. He’s like, the our customers have to go profitable in, forty days. That’s the b to c world that you and I are less familiar with. But if you’re gonna do very small business SaaS, you start to overlap b to c a little bit, don’t you? There’s an overlap here. The last point I’ll make is the big danger you can make, and this is why that company ended up having a mediocre outcome, You can’t put enterprise or mid market people into these SMB models.

The just the toolkit, the type of people they hire, the way they spend in marketing, the the customer lifetime, none of their metric it just doesn’t work. It doesn’t work if you come out of ServiceNow where the average customer lasts a hundred and eighteen years, and GRR is 99%. At ServiceNow, the GRR is 99. They keep 99% of their customers over three years. Forget about the others. You just can’t put that person into an SMB environment. They don’t

I think it’s almost certainly a pass, but here’s where you have to check yourself. Everyone in life has to pass a twenty minute test. By minute twenty of the meeting, do you think this founder is so great that you have to invest? If they pass the twenty minute test but they have a crazy metric, just share it with them. Just say, listen, Harry, I love everything I’ve heard today. Just wanna let you like, 8,000,000, we’re at six today. So $8,000,020.25 seems a little modest, and maybe he’ll laugh.

Like, I okay. I’ve never raised money before, Harry. You know, I I wanna do 60, but I thought if I put 60 in, you know, I read this thing on Reddit, it said don’t do that. Every once in a while with a first time founder, they get bad you know, everyone gets bad advice. So you gotta if you love them, give them a chance to self correct on that mistake.

I don’t think we know. I think it’s fine not to know. I think that’s called venture. I think we invest in things that are exploding. And so I think if we’re trying to overanalyze some of these AI explosions, we’re we’re missing the fact that we can make 20 investments per fund. I think the bigger issue is when the burn rates are vast. That’s a bet that I it’s just a crazy bet. It’s one thing if you go if you go from one to 12 in a year and you’re cash flow positive like Opus, that’s okay.

If you go from one to 12 in a year and you’re burning 50,000,000 of some big funds money, that might be a great, I mean, you know, great investment like an OpenAI, but that’s a kind of bet I don’t know how to make. It needs so much capital. Do you just throw a chip in and walk out the door and and tell them, let me know if you need a tweet or to be on the podcast? I’m not I’m not sure what you do if they’re gonna burn fifth.

The way we invest, we haven’t seen these types of burn rates either. Even when we’ve seen some that burned a lot like a rippling or something, it was very intentional. It was like, here, Parker, here’s why. It was decent in the early days and it’s really high. But, you know, if they’re coming up on 400,000,000 and there’s a very specific reason why and there’s a plan and it’s pretty consistent with the plan, it makes sense. If the founders are great and they have an answer, you gotta make some of you gotta make the bet if they’re great.

You gotta make the bet.

I think the other hubris that a whole generation of folks on 20 and otherwise are we’re all gonna slowly regret over the next decade, And this tough one to solve is just these low ownership stakes. Who was it? Was it Silver Lake that just said they regret every deal they did in 2021 that was small? Like, we’re only gonna make any money on our big positions. We regret everything. And the problem isn’t that this AI deal’s at a 150,000,000 pre in the seed round. I mean, that sucks.

But if you have a $50,000,000 seed, even a $100,000,000 seed fund, how much can you put into it without creating systemic risk in your fund? Founders don’t get this nor should they, but this is why I I actually, Harry, believe that a lot of seed investing is is systemically broken today. Let’s just do the math. When I started, a typical you know, I did Pipedrive at 16 at a million in revenue. So now your typical y c deal is at 25, right? And you can’t buy much, right?

So like, so you got to do a 3 or $4,000,000 seed check and you have a $50,000,000 fund. How does the math work? You either have to take systemic risk, right, and do like six investments or eight investments, or you have to buy tiny stakes. Or you have to find pre pre pre seed stuff. Right? Or you

Even a hundred’s barely enough at a $5,000,000 to own a true 10% a true 10% or 12%, 12% because you’re gonna get diluted. So you need to to write a $3,000,000 check, pre revenue, a 10 MRR, two k MRR. And I think everyone that complains about YC is missing the point that it’s not for them. YC doesn’t owe it to anybody to create rounds that make certain VC funds happy. I mean, we would it’s it’s okay. How many folks are there per batch at YC now?

It’s a 150. Right? So Gary and team’s job is to get a 140 of them funded as quickly and as possible. And the next week, they’re on to the next batch. Okay? This is not getting just one or two funded because even if it’s Stripe, you don’t know for sure. Right? So the most efficient way with their brand is to get have everyone sell up these really slices, create a lot of FOMO, and get it done. And it doesn’t make sense to to accommodate different structures of seed funds.

It does it’s a bad business model for them to to make folks like you and me happy. It only works for them. It doesn’t work for anybody else. It doesn’t even work for EF or certainly anybody else. It only works for them.

RevenueCat’s a fun one. I’m usually not the first investor, like, literally the dollar in the door. I’m usually the first institutional. But this is the first time I’ve been the first investor at, like, $30 a month in revenue. I confused their their basically, their GMV with their ARR. I got it wrong. So I thought they were doing, like, $10,000 a month in MRR, but they were doing managing $10,000 a month in subscriptions and making like $30. So I took a little more risk than I usually did.

That was an easy risk to take because the co founders already knew the space cold. What was the price and what check

The first check was for about 10%, and it was pre y c. So I think it was 7 or 8,000,000 pre but that would be 25 today. Right? That was in 2018. That’s a tough structural issue. Right? And it was before demo day and all that kind of stuff. And then they did only have $30 a month in revenue, so maybe it was a good But today, would just wait and get 25.

When you have founders that are truly committed to a multi decade journey and know a space cold, maybe that’s the most important thing of all. Right? So RevenueCat is on 30% of all mobile US mobile devices managing subscriptions. And so that they’ve crushed. Developers love them. The product is great. Have they been too slow to develop the sales led side of the business? Yes. I think Jacob and Miguel would admit that they’re a little slow to go. They lean too much onto the PLG, too much onto the brand.

But it’s okay. They’re at many tens of millions of revenue. They can they can do more there today. They’ve just closed their first million dollar deal. Okay? Maybe they could have done it a year earlier, but it doesn’t really matter at some level. And so there are times what’s fun about a company like RevenueCat is there are times when a company or sometimes an executive comes into their own. Right? Not everyone can see it. And now everyone can see that this is like the right team for the right problem at the right time.

And just back them. I never had one second of lack of as you probably we’ve chatted just for a few times about this company of yours for fun. I’ve never had one second where I doubted the team. Right? I questioned them a few times on different things. Never one second because they understood a problem and were committed to it for twenty years. Right? And, don’t wanna get acquired and have a plan to IPO and for all the right reasons. And and maybe that’s a rambling answer to the question, but those are the investments where I just don’t think you can lose.

And and when I’ve but my losses, to tie this all into the theme, my losses are when the founders weren’t that way. This $5,000,000 loss I had, they were woe as me. They’re like, I tried really hard. This company started the same time as RevenueCat. For a while, they they were growing just as quickly. And then they’re like, oh, it got so hard. And I had churn and I lost my customers. And and then this $5,000,000 company, one day they came into work and they fired their entire sales and marketing team.

With $15,000,000 in the bank, they fired everyone, just like Elon. But Elon’s a better founder, fired a supercharger team. He came and told nobody. And because growth got harder, they fired every single person in sales and marketing. So my mistake of 2021, when everything was great, following somebody else, it was I I don’t it was a waste it was just a waste of energy. The slightly second lesson, which you probably agree with is, like, there’s no good deals. If a deal seems good, don’t do it.

You know, and the funny thing is and also, that was the last deal of that fund. Right? So there’s also some micro learnings about managing the end of the fund because, you know, I’ve never thought I was that good investor, but everyone was kind of a genius in 2020. I’m like, well, you can’t lose money. So I might as well make some extra money in the fund because we’ll be so far into carry. Every extra dollar is just profit. It’s like it’s kinda like recycling. Right?

If you can recycle just right, and this is the classic argument for recycling. Hey. Maybe you’ll only make three x on your recycled investment. But if you can invest another 10,000,000 out of your fund and three x it, that’s 20 extra million to the LPs and, you know, 4 to 6 extra million to the GPs. You can’t lose. So this was an end of fund thinking, and I will never approach an end of fund investment treated any differently than a start to fund investment. I will never do that again.

The only lesson that’s actionable is, you know, we talked about the company where we exited at a 100,000,000 during lockdown. Right? I should have recycled all that money instead of distribute it. It was impactful to a seed fund, right, because it was a significant return. But it was so it was early in the life cycle of the fund, and now I wish I had those tens of millions to put into the portfolio. I I think I will learn how recycling really works just after I retire from investing.

I don’t think I’ll truly understand it. However, I mean, I get it, but like, there’s so much you have to manage so many funds, so much money to get it right. But just recycle recycle everything, I think, is the learning. Right? I just wish I had that those extra $20,000,000 to put into that portfolio today, because that’s another way to get an extra x out of the fund.

Do you worry about that? I do worry about it. I I do worry about it. There are downsides to not working for other people. Right? Like you and I aren’t. There are downsides to it. It’s a great question. I do I do worry about it. I do think I need to invest more quickly. I feel like I’ve made enough investments that the financial returns from the existing portfolio will be good enough. I think I will achieve my investing goals from the investments I’ve made in ten years, but I would like to play two more cards.

I’d like to do two more funds. I’d like to have six more big winners. That would be enough, but I’d like to have six more fund returns.

Yeah.

When we talked about SMBs, I think when Service Titan does IPO, soon, I think we’re gonna see that ARR is one of the most underrated folks coming out of Pasadena, doing it his own way, selling to plumbers and folks, always committed to this mission. I think him and Andrew from Klaviyo were just missed because they’re out of the circle. Klaviyo was missed because it didn’t really raise or do other things. They’re neck and neck. I mean, if you’re in if you’re outside of the Shopify ecosystem, you’re like, what the heck is Klaviyo?

They they IPO ed. If you’re in the Shopify like, if you have any investments in it, Andrew and Klaviyo are like god level. God level. Coming up on a billion, dominating this thing, kicked Mailchimp out of Shopify on a billion of revenue. They will be soon be doing more marketing revenue than HubSpot. They will cross they will be doing more SaaS revenue than Shopify in a couple years. This is a force of nature. And there’s been a little bit of grumblings when they raised prices this year, but I would say until recently, I couldn’t even meet anyone on the planet Earth that didn’t love this product.

That is next level stuff, isn’t it? Market cap today is

That’s one of the reasons I have some some malaise and worry in venture. It should be ten, eleven, 12 in my mind. There’s not much better than Klaviyo out there. There’s you could you could give it a discount for for having a platform risk, but based on what I follow the company pretty closely because of Gorgias, I don’t think anyone gives it a discount for platform risk. This is why this is why almost every SaaS company is overpriced in the venture markets, because of Klaviyo. If Klaviyo was worth 20,000,000,000, then all these deals we’re doing makes sense.

What do you think is the most overvalued companies today? I I’m hopeful that almost everything in SaaS is undervalued. There are folks where sometimes I wonder why a Klaviyo is trading at what are we coming up on a billion? So we’re trading at basically six x ARR. Right? Sometimes I wonder why and Atlassian, which is an iconic company, could never say anything but positive about Atlassian. Sometimes I wonder why it’s trading at twice the revenue. Why is that a 12 x company? It’s growing 20%, which is great.

It’s not 40%. It’s has great cash flow. Some of these mark there’s just multiple dislocations. I just I’m not I’m not a smart enough public guy to get, but the Klaviyo to Atlassian gap in multiples is remains a mystery to me.

I don’t going back, I don’t know what happens to these PE companies that invest less after they do. I don’t I don’t know. I mean, our little team at SaaStr, we are accidentally stuck at Marketo. We would be on HubSpot if we could be. We have huge data issues for migration, but we’re stuck on Marketo. And so but it’s kind of fun as a case study. I mean, literally, I don’t think they’ve launched a feature in six years or whatever. I mean, I guess it’s under a PE and then Adobe.

Nothing. It’s the same same clunky app. A lot of people still swear by it because it is powerful in the enterprise. Right? What happens when companies stop innovating? I don’t know. I guess the meta question is, can they grow in the teens? This is the Dropbox question. Can you grow in the teens? Right? And sure, pigment maybe pigment’s on fire, but, again, I can’t segment the market. Maybe Anaplan is stronger in in the true enterprise, for example, or maybe they have maybe they’re impossible to rip out.

I think if you can grow in the teens, you’re still gonna hit the rule of 40. I think if we look at our public companies, you still have a lot of enterprise value if you hit the rule of 40. Doesn’t get there’s no point in venture. But in the public markets, there’s still a point. So maybe that’s the bullish version is that these companies have even though we can be critical because we’re so focused on the upstarts, they may have a decade to run if the growth is in the teens.

Even 15% growth over a decade, that plus maybe 35% margins, those compound to a lot. 15% a year is better than most VC funds make.

I basically have two anchors, and they’ve been the same my whole career. I have Horsely and Transpose. Together with their affiliates and friends, people would say it’s a bad idea. Think they’re 80 of all the funds I’ve done. People would say that’s a bad idea. It’s too concentrated. But everything I’ve asked for, direct, indirect, follow on whatever, they’ve done it one way or another. So for me, for what for my gig, it’s worked out pretty well. So what’s my my learning from that may be radically different than, like, 99% of people.

May if you can find a couple LPs, ideally four or five that truly believe in you and you don’t put up too many mulligans and you deliver with some regularity, it’s a gift because you can kinda do your thing. Even if you’re a little criticized for investing slowly like we talked about, you can kinda do your thing. And I I’ve worked in environments where it was very transactional with LPs. Right? And I’ve worked with in environments where you’re more supportive. It is better to be more supportive.

And maybe it’s better to not be agro. Maybe it’s better to leave a few nickels on the table. Maybe it’s better to go the extra yard. I don’t have the answers. Let me put it differently. I’ve been able to work with my LPs like I worked with my VCs, which is a a good framework for me rather than to work with them, which maybe, you know, maybe another kind of mistake, rather than work like everyone’s just a

Well, first, my advice to everyone out there that, like, emails me, hey, can I invest in SaaStr Fund? Don’t put money into any of them, is my advice to individuals. Everyone’s full of shit. If if you do a seed x a seed fund and you make three x net after sixteen years as an individual, put the money into into S and P 500. Put it into VTI. It’s not worth the extra gains for the illiquidity, and people don’t put enough they don’t write a large enough check into funds as individuals.

Right? If you put half your net worth into it, I would get it. But if you’re putting a $100 or $50 and that triples to a $150 after sixteen years and it’s illiquid, it ain’t it ain’t worth it.

The little bit I know, I’ve been doing this just long enough, that I see all these funds decaying. I see partners leaving. I see old playbooks not working. I see folks struggling. I even see pretty good investors investing more slowly. You see folks quietly stepping back or they’re not investing themselves. Their teams are doing all the investments now. So I have the same issue that I think is the existential challenge for LPs is you’re you’re looking backwards. And a lot of these funds that we all look up to, a lot of those managers aren’t even active anymore or they’re not fully active.

And a lot of folks’ returns, you have access to a thousand times more data. A lot of it is not as impressive as you might think. Not that you need me, but the handful of times I’ve been able to help you, I’ve recommended you. I’m saying I can’t predict the future perfectly, but here’s someone that has the right drive, that has enough of a track record to put together. I think you gotta make the Harry Stebbings type bets, because I don’t know how to make the rest.

Look at look at like OpenView. Right? Made so much money on Datadog. They owned almost 20% of Datadog. $34,000,000,000? And then you’re done. And then you’re one guy owns the whole fund. Right? My general assumption in all these situations is the most logical thing happened, which is look, you know, if you have one guy getting owning the management company in like 50 or 80% of the carry, and you have a Datadog exit and then it gets harder. Everything gets harder. Why would you keep doing it?

You gotta love it. I mean, you gotta really love it. So, like, if they made 4 or 5,000,000,000 off a couple $100,000,000 fund, let’s have some fun for the audience. We should do the math better. But let’s say they made 3,000,000,000 in carry. Okay? And let’s say it was just 20%. So that’s 600,000,000 of the partners, But that one guy owned got 60%. So let’s say you made $354,100,000,000. And now you’re in your new fund and it’s hard, Harry. We’re sitting at one x. I gotta hustle and my valuations suck.

Datadog every investor that got into Datadog until the late one got in cheap. I mean, we did we did a fun one together with, I Ventures and the others. I think they invested, like, four or five million in Datadog in the early days. Right? OpenView, I think, did it in the teens. Right? Now they’re like, next Datadog’s at 400 pre. You’re running the fund, and you’re like, okay. Listen. I gotta sign up for fourteen years, and I’m gonna make, like, nothing in carry or a couple million.

I made 300,000,000 off Datadog. What would you do if you didn’t see 3,000,000,000 coming? Like, you’d hang up your hat. I’m assuming that’s the answer. I could be wrong, no offense to anybody, but I just think my limited understanding is they made so they have some good investments, but there’s no way they’re gonna make 400,000,000 as GPs off Calendly. It’s great. I mean, it’s such an iconic company. But owning 8% of Calendly at a 3,000,000,000 entry price is not the same as owning 20% of Datadog at 16,000,000 entry price, is it?

Calendly we all love Calendly. Let’s say IPO’s at 6,000,000,000 and they invested 60,000,000. Probably doesn’t return the fund, does it? We blow your brains out. Right? And you ask why I invest more slowly, there’s a lot of reasons. But one is, listen, I don’t want smaller ownership stakes. I don’t want single digit ownership stakes. I don’t want anything that doesn’t return the fund for real, not for fake, not to raise the next fund. Right? You realize, like, there are there’s a lot of fake bravado on Twitter and a lot of folks making personally very little money on very high profile investments.

Right? So that’s my may not be what happened in OpenAI, but when you have one of these outlier events, right, even the guys at Emergence who I love, you know, they’re they had a gentle transition when they made they made so much money at Emergence between Bill, Viva. They own 30% of Viva, and they held it. Right? So let’s have some fun. I I I’m not gonna look it up, but what Viva’s worth, what, 35,000,000,000 today? Yep. A 100%. I know they kept it at the fund level until 8 figures.

So let’s say let’s say they had 25% carry and distributed at 20,000,000,000. So the partners let’s say they had, say, billion. The partners had a billion to divide up between themselves and that fund, plus they had Yammer, plus they had Bill. This This was an epic fund, this fund. They had little old EchoSign, didn’t even get above the line. And so how would you keep going? I mean, Gordon’s still there. It’s a great fund. Right? But, you know, when you have those moments in time, I mean, it’s so so much money.

I was on a board with John Doerr when I started investing, and I asked him why he kept doing it. The only thing I saw was he still had the sparkle in his eye, you know, back then. This was 2014, but he still had the sparkle. But if there’s if you’ve made that much money and the sparkle’s gone, dealing with this bullshit is not worth it.

It’s gonna be fun. It’ll be good.