Roundtable: Are IPOs Back? Is Growth Dead? What Does it Take to Raise a Growth Round…

Sure. Deven Parekh, managing director with Insight. Been at Insight since January 2000. When I joined Insight, the market was rip roaring. And about four months later, it was no longer rip roaring. So I’ve kinda been through the current rodeo before. Insight is kind of a global investor in software. We do everything from early growth to buyout, and happy to be here, Harry. Woody, over

Yeah. Woody Marshall, a general partner at TCV. I joined TCV in the beginning of two thousand eight, so the world was not rip roaring, you know, when I joined. TCV has been around for almost twenty nine years. We do two things, growth and technology, software and consumer. You know, just to give context, there are lots of different definitions of growth. About 70% of the businesses that we invest in are at least 50,000,000 of revenues and half are profitable. That’s how it comes out when you look at the data.

For us, we’re focused on growth assets. That’s what we’ve been doing, and that’s what I’ve been doing, you know, for the better part of almost thirty years.

anyway. Sure. Jason Lemkin. I run SaaStr, the largest global community for SaaS founders, and I’ve been investing seed investing for about ten years. I’m pretty excited. I’ve got three or four after ten years that I’m hoping will IPO at the end of next year. I’ve had some billion dollar exits, one with Insight, hopefully one with TCV soon, but I haven’t had an IPO yet. So I’m super excited to learn how great it’s gonna be at the back half of next year. And we’ve got some standing bets around this, by the way.

Back

First of all, growth is not dead. Let’s start with underlying growth in actual companies. If you look at q two of twenty twenty three, Insight has a 180 portfolio companies that grew north of 50% in q two of twenty twenty three over q two of twenty twenty two in, you know, what are clearly more macro challenge environment than we had maybe a few years ago. So the underlying growth in companies is still there. Now that’s separate from where’s the growth market as it relates to new investment.

And like many people, our pace is down dramatically. We have done new deals this year, but many fewer than we did in ’22, many fewer than we did in ’21. The one thing I would just point out is if you look at ’21 and ’22, there was a lot of series A and series B investments that got done. When a company gets funded series A, series B, you know, you’re not typically funding a company for three to five years. You’re funding a company for twelve months, eighteen months, twenty four months, so kind of the next next proof point.

And so as we kinda get to the beginning of ’24, you’re gonna naturally have companies that are gonna need to raise capital. And some of them are gonna have executed reasonably well, notwithstanding the environment. And what will happen is they’ll raise capital. They just might not raise capital at the price they want to raise it at. I don’t anticipate the growth market being dead. It’s definitely the pace is gonna be dramatically lower in ’23. I don’t know that we’ll see ’21 pace anytime soon or if ever, but I I also think that and this is one of the things we talk about internally, particularly when we’re talking to the team.

This market is probably closer to reality than ’21 was. And, you know, the pace of actually being able to spend time with companies, build relationships with management teams, take them out to dinner, see how they do over the course of six months is really what this business always used to be, and I think is what this business will go back to being. And so I’m actually while, obviously, there’s we’ll talk later about what happened in ’21, I’m optimistic that we’ll get to a reasonable place. I still think there’s a lot of really interesting companies out there that are growing.

Woody, how do you respond

Deven’s totally right. I mean, volumes are down. There’s still a disconnect between buyers and sellers. You don’t have the opportunistic fundraisers that certainly happened in ’21 where somebody may have raised money and and, you know, another investor got excited about what that opportunity could be and bid them up two x, three x, four x, you know, very quickly. So I I think transactions are happening, for very specific reasons. You know? Maybe there’s some strategic m and a. You know, there’s some specific growth investments that have been, you know, well thought through.

The company may have taken some debt, which, you know, was free before, and now it’s actually expensive. So I think that there are some real business reasons that are driving transactions. You know, you’re also seeing some secondary. I mean, a lot of people haven’t gotten much liquidity. Not that early investors are selling an entire stake, but provide some partial liquidity. You’re seeing these things. I mean, look. We just did a deal a deal with, you know, that Deven and the guys at Insight were in. It’s a classic minority software, you know, investment, $100,000,000 plus investment, $100,000,000 plus business growing 50%, but losing a little bit of money, but very focused on a number of really thoughtful growth initiatives.

Actually, there’s ROI that’s behind them. The the team is thoughtfully allocating, you know, incremental capital. So they’re definitely happening. And to Deven’s point, I think you’re seeing companies that are executing well. The issue is you need a reason to wanna raise money today because there is that valuation disconnect, and there’s a lot of investors that they’re trying to buy, you know, a dollar for 75¢. They look at the public market and think that there’s a great deal there. Like, I just don’t think those transactions are happening.

And I agree with Deven. I like the more normalized pace. Investors get to do their work. Management teams get to understand the investors that they’re getting involved with. And I just think you end up with, you know, better decisions and and more commonality and kinda shared vision and execution, you know, after the a transaction gets done.

Is that for folks that maybe haven’t been in the venture markets before 2020, is that is six months a reasonable way to think about pacing for a growth round? Do you guys like to see two quarters and get to know folks? I don’t what and was it at 2021? How fast did a deal get done in 2021? By the way, don’t think it was

a magic to six months. I I just I I think it No. But I thought it was just an interesting anecdote. You know? I mean, I I just I would say the other interesting thing is, like, we have a bunch of companies in our portfolio, companies that, you know, we like. And I think what we have been positively surprised by that one literally that we just got a term sheet today. I wasn’t really even expecting a term sheet, but we got a term sheet from a firm that I’ve never seen before that, you know, showed up with a pretty attractive term sheet.

Now we’re gonna participate in the round. Company’s actually doing well. So I think that companies that are executing well, that have reasonable expectations of value are are really able to raise capital today. The one other thing I just point out is there is another driver of why companies are not rounds are not happening, which is that companies were smart. That when the cost of capital was low and valuations were very high, many of them went out and raised a lot of money. We have multiple companies in our portfolio that have between 3 and $500,000,000 of cash on their balance sheet.

And their last round was probably not a round that they could not replicate today, and they actually kinda know that. The the news flash is they don’t need to replicate it because they took advantage of that time and raised a lot of capital. And so the other reason is is that’s not a deal where you’re gonna get easy clearing price because the company has no

different constituencies that I worry about in that case. Obviously, I worry about myself, like, because I might have written a jack. Or two. But but probably more importantly, I actually worry about making sure that the team is incented. And so I think there’s gonna be a lot of those cases where companies with our support, we are gonna significantly reduce the valuation of the option and equity incentives going forward. Because I don’t think what we can do is look. Part of a lot of those rounds, obviously, is investors are sitting in preferred stock in most cases.

And so they have downside protection that the employees don’t have. What is gonna be important is because these companies are really not worth much if you don’t have a team that’s motivated. I think that there will have to be a realignment, Harry, around how you create equity incentives for the team in these companies. But for investors, it’s gonna take longer. So a deal that you might have thought might take three or four years might take five, six, or seven years, and maybe at five or six years, you might only get your money back.

But it might be that in a place where I get my money back or a late stage investor gets their money back, employees still really need to earn money. Right? Because so a lot of value creation needs to happen to get there. So I think there’s

I think the important thing is only thing that’s gonna determine ultimate valuation for any of these situations is the performance of a company, and companies don’t run themselves. So there’s always these discussions about so and so raised the, you know, a lower priced round for the $409.08 to what Deven was talking about. $409.08 is so much lower, and it’s written about in the press as, like, this bad thing. Look at this stupid company. And to me, I have the totally opposite view, which is here’s a company that is by way, if you’re a public company, there’s no argument.

Right? Like, your stock was trading at a 100, and now it’s trading at 25. There is nothing to argue about. On a private company, the smart companies are resetting the deck. They’re ripping Band Aid off because the problem with companies that hold on to some of those valuations is they’re going to make decisions that are suboptimal when you think about how to build the business over the long term. And as an investor, by the way, we take that risk, and Deven’s right. Like, if you look at the things we invested in ’21, we like those companies a lot.

It may take it’s gonna take us longer to get our returns. It just is because multiples have come down. But if you never have a company that level sets to where they are, a, you’re not gonna have motivated employees, and you may make decisions that are not the right decisions for the organization. Shoot the moon. By the way, the only way we’re gonna be worth anything is we have to literally put everything in. I’m all in on black as opposed to thinking about how should you most efficiently allocate capital given the environment that you’re in today.

The one thing I’d add, where you have companies where they’re trying to hold on to that last valuation, forget now from an employee standpoint, but because they think it’s better to go to their employees and say our valuation’s flat when everybody including employees know it’s not. And then they go out and try to raise some heavily structured security in order to try to kind of preserve value. And I actually think that’s the most dangerous thing the company can do because then you do create a a challenge because you create an artificially high valuation that’s not consistent with where current values are, makes it harder to actually strike the four zero nine a valuations where they probably should be struck.

And you’re also not just being intellectually honest. In a public company, when Facebook stock goes down, they take action, the stock goes up. And so you just don’t get to do that in a public company. But when you start thinking that your company’s worth something like, look, Instacart’s an example. That valuation came down a lot. The pub you know, the $49.08 valuation came down a lot. Now it’s a public company. It’ll end up trading over the next few years based on its underlying operating performance.

Can I ask a question about that, about structured terms? Everyone on the internet talks about how toxic structured terms are. Right? Are they so bad? Imagine Harry and I are running a startup together. We’re at 50,000,000 in ARR. Okay. We’re growing 80% pretty good. And we raised the last round at a billion. Okay. Not at 5,000,000,000 or 50,000,000,000. And we got someone that’ll do the they’ll do a round extension at a billion, but they want to get a guaranteed two x return. Okay. I get that it’s debt like, but Harry and I want the money.

We get it and Harry and I are in it for ten years. We’re gonna IPO. We’re gonna get to $3.04, 5,000,000,000. Why is a little structure Box had it when it IPO ed. The other had it. Why is a little structure so bad? I’m not sure it bridging the difference is the end of the world, is it? Well, look, it’s great when the outcome works. Right? Like Yeah. But we’re going for it.

We’re all going for it. The four of us are going we’re going for these big outcomes. When you go to the casino and you bet on red and red wins, it’s great. It’s just when you bet all on black and it goes red, it’s not great.

Yeah. By the way, it’s just it’s the same as preference. Right? When things work out, you could have invested in common as opposed to preference. Yeah. Time preference actually comes into play when it doesn’t work. By the way, this is a decision that, you know, the issuer has to make, you as the company. You know, we don’t like it because we like to be on the same side of the table, and I just think all of a sudden you have differing motivations. Heads, I win. Tails, you lose.

We should all benefit as the value of a company is created. I also think there’s you know, from the investor standpoint, there can be the fallacy of, oh, look. This is a really interesting, you know, opportunity because of the structure. Structure never made a good company. Right? Like, at the end the day No. It doesn’t make a great company. Find a good company and pay the right price. I understand why people do it because sometimes adjusting a price creates a crescendo of other things that happen, any dilution, bunch of other things.

But in a perfect world, I’d rather everybody being on the same side of the table where just driving enterprise value benefits everybody as opposed to differing outcomes depending on, you know, what security you want.

But, Jason, let me ask the question of why I would care in that situation as an Yeah.

Why do why? Because every VC at every level from pre seed to crossover has a bias. Right? Every bit of every bit of advice from all including all four of us, So I just wanna penetrate the bias.

I’ll tell you why. I would care in the situation you said. Right? Yeah. Because the $50,000,000 ARR company is growing 80%, and you raised Yeah. Harry and I are feeling pretty good. You’re feeling pretty good. But the odds are that you’re not going public. The 75% probability is you’re not going public. And if you end up with a structure that says the structure only converts at 2,000,000,000 when Cisco comes along or IBM comes along or name of whoever strategic you want comes along and says, hey.

Here’s a billion 4 for the company, and that’s, by the way, 17 times trailing revenue. And the founders are sitting there going, well, I’m not gonna do that deal because I gotta wait for my two x conversion because that’s the only reason I took that money. We’re not totally misaligned. What could have been a good exit for me and you, but you only wanna happen if the deal structure I’ve been in that exact situation. Yeah. So I like alignment. Now what I’m not saying is two things.

One, I’m not saying that we don’t have any companies that have it, and b, I’m not telling you that we’ve never done a deal that has it. But the deals that I’ve done that has it almost always preferred in the end that I didn’t have. Because structure ends up trying to bridge evaluation gap at the end of the day. My view is I’d rather just either get to a deal that I’m comfortable with or not. And if somebody else is willing to do it with structure, I’d probably rather just let that other person do the deal.

Well, that might be the insight right there. Right? You’d rather let someone else do the deal.

Because of the conflict. I want Jason when that bid comes in from a strategic Yeah. I want you and I thinking about it exactly the same way, not different.

Yeah. That is an issue. And if you talk to LPs, there are many of them that are waiting and all the shoes dropped. And, you know, it’s not a perfect world in terms of you can have many different investors in that same company, you know, holding a particular security or a particular company at different prices. It’s definitely an issue. But fundamentally, you want everybody to try to get to the point of this is a fair price because the decision issues that Deven talked about, until you’re all on the same side of the table, somebody may be fighting for something that is not the right optimal outcome, but it’s the right thing for them in the short term.

And that’s a bad thing over the long term. So LPs are trying to get smarter. If you’re a firm as big as mine or as Deven’s, there’s a very sophisticated process that gets reviewed by auditors, which is a little different than, you know, with a lot of the early stage guys. So it’s hard for us to play around with valuation, and I just think that needs to flow through to, you know, everybody in the investor community, or you have all of these different opinions that have different motivations, you know, given their valuation discrepancies?

I think you’re gonna see, and we’ve done a bunch of these deals. Others will have done some of these deals. Those are gonna be companies that they’re not all perfect public candidates, but some of them are not necessarily perfect strategic candidates either. Meaning, there’s not a logical strategic who wants to own the asset for whatever set of reasons. And I think you’re gonna see that those firms can get bought by sponsors or firms like us. I think there will be a market for those types of assets.

And I think the challenge is gonna be, in my view, is those assets that are not growing that fast. And the lower left quadrant is crappy growth, high burn. Like, if you got crappy growth, high burn, like Don’t need to email. Yeah. Right. I would really request you send your pitch to Woody. I’m teasing. But I think that the companies that have just like you’re seeing in the public markets, what you’re seeing in the public markets so if you go back to 2020, the correlation to revenue multiple in the public markets was something like 72% was correlated to revenue growth.

Today, it’s in the mid thirties. What’s the spread? Well, path to profitability or free cash flow. And everyone’s reset. Now I don’t it’s not like Woody has to show up at the board meeting and tell his CEO, yeah, you really should be more profitable if you wanna go public. Because all you have to do is or she has to do is look at the public comps and look at what the research says. There’s gonna be absolutely a market, Harry, for companies of good revenue scale that have got reasonable growth that can kinda build a rule of 40 company.

Are you guys modeling that this efficient market or that correlation for revenue versus profitability? Are you modeling that’s gonna be true in ’25 2025, 2026? My gut is that historically, that’s been a minority of years in tech. Right? Most years, we’ve been valued at and you guys don’t have to think twenty years out. Do you wanna value it the way it is today or where your gut is it’s gonna be in 2024, ’25, ’26?

When when when we did deals in 2021, and I’m talking now about revenue revenue growth driven deals, right, as opposed to buyouts that were more EBITDA driven. We do both. We were assuming on average 50% multiple contraction. Now at the trough, they contracted even more than 50%, and now they’re kinda come back to close to 50%. If you look at long term software multiples, like, over fifteen years, today’s multiples are lower than, like, the fifteen year median, but not by 40%. Right? So

No. Maybe 20 20%.

20%. So I actually think there’s upside, personal opinion, but I think there’s upside from today’s revenue multiples. But I certainly wouldn’t think that we’re going back to 20 multiples either. Right? That’s a different environment.

Yeah. And I also think over time, as businesses grow and they may slow and, you know, there’s the rule of 40, these are these rules of thumb. I was talking to some capital markets folks recently that were talking about two years ago if you had talked to the public market and you asked them, what would the combination of revenue growth plus EBITDA margin is your rule of analysis? And what was if you wanted to get to rule of 40, that’s special company, what were the characterizations?

What were the the component parts? And it used to be 60 to 70% growth with the negative 20 to negative 30% EBITDA. Today, depending on who you talk to, it’s like thirty and ten, twenty and twenty. They wanna see both. And I think at least Deven’s a 100% right. When you’re in the growth world, the multiples that you enter in are very different than the multiples that you underwrite your exit on. And that’s just the nature of the deceleration of the businesses they scale. The other thing is revenue multiple may be an output, but it’s not the metric.

The metric might be, here’s your EBITDA multiple. Take a look. Over time, things will start to trade at EBITDA or they’ll trade at, you know, maybe it’s gross profit for a little bit, then it goes to EBITDA. And over time, it’s gonna get to net income. At the end of the day, like, you know, we were Facebook investors when it was private, and the thing was growing like a weed. By the way, it was very profitable. But read every Facebook report that comes out. Nobody talks about revenue.

Some people may talk about EBITDA, but it’s net income. That’s the evolution of these businesses. And I think you have to figure out in your whole period, five years, where are you? Are you 20% revenue growth business? Are you still 50 wherever you are? Because that’s, I think, a little bit of where you’re gonna be on the valuation continuum, especially with the metric that is most relevant you know, to

Jason, when I was in high school, I remember going up to an Ivy League admissions officer my junior year of high school and saying, hey. Am I better off taking an honors class and getting a b or a regular old class and getting an a? And they looked at me and said, well, if you wanna come to our school, you gotta take an honors class and get an a.

It’s not a choice. It is not a choice, though. I think many founders and others are confused about some of the messaging around efficiency today. Right? And will you guys because there are macro impacts still, we’re not over these macro impacts. Will you take a lower growth rate with an Aswis and Dagger and assume it will reaccelerate if we have a very efficient model? Right? Will you settle for a slightly lower growth rate today than maybe two or three years ago because of macros, or is there no credit for is it the Harvard AP Biology?

Jason, I think the problem is that I think it’s kind of very hard to generalize the answer. Right? Because take a consumer growth company. Right? I think there’s lots of examples, and TCV has examples, and I’m sure we have examples, where you’ve got a consumer growth company whose growth rate was really just driven by a payback period that just didn’t didn’t make any sense. And if you say, okay. I’m gonna change my payback period. I’m making up numbers from twenty four months to eighteen months or twelve months based on kind of the gross margin and what my ad costs are.

That growth is gonna slow down. It might not reaccelerate. You were just acquiring customers that were not gonna long term be profitable. Now that’s one example. Another example might be kind of an enterprise software company whose customer acquisition costs got really expensive because they bought too many seats during COVID, and they overbought. But the fundamental macro of that market for the next ten years is great. They just got an overbought period. So you cut some of the expense, but then that business will probably reaccelerate once they can get over the hump.

So I think the problem is people always want, like, the easy here’s the one rule and just follow this rule. Kinda depends on your business model, depends on kinda what’s changing about your income statement, what affected your growth rate. I mean, I guess if it was an easy rule, none of us would be making much money doing this. It is a little bit dependent on the business.

That’s a good question, Jason, but I think we spend a lot of time on product, understanding where the product is, understanding how the customers are excited about the product. Deven mentioned one of the things that you certainly have seen, which is folks overbought. So understanding what the core value of a product is, what should the pacing of, you know, a customer relationship look like, all of the metrics of gross retention and net retention, which are really important. But if you think about one of the things that drives net retention, obviously, besides gross retention, net retention is what are some of the other products and features that you can add to the customer.

And to me, the thing that we spend time on is if you are really embedded in a customer and by the way, this is whether you’re talking about a consumer or whether you’re talking about a small business or an enterprise. Are you valued enough because of what you provide? You’re in a really strategic position. So as you build more functionality, you have a a right to win that versus someone else. And the magical companies are the ones that when you’re three years into your hold or more, the opportunities that you’re talking about are product initiatives that weren’t even being discussed when you made the investment.

And that’s companies that are really, really focused on innovation and integration. There is no math problem that can do that. This is to Deven’s point that, like, that’s the thing that you really have to understand. What is the opportunity? What are the problems that the end customer has? What are the solutions? And why is the company that you’re getting excited about? Why can they take advantage of that opportunity over the long term? And some of it may be a numbers issue, but the inputs that are most important are tell me how good the product is and how can it be extensible over time, you know, given your position with the customer.

Look. I think Klaviyo is trading at eight times forward, you know, growing at 50% with, you know, I think profitable Shopify concentration, maybe that’s an offset. But, look, if 50% growth with great economics or eight times forward, there’s a lot of companies that have less good economics. But I would say this, the least active part of the growth stage market is late stage growth. And I’m defining late stage growth as what used to be called pre IPO, know, however you wanna define it. Right? I’m going public within a year.

Because I think, frankly, it’s the least clear of how you underwrite your return because those companies are looking for valuations that in some cases are north of the public comps. Now it’s very different when you’re investing in a $20,000,000 revenue company or a $15,000,000 revenue company. You’re making a different bet. You’re making a bet that’s four or five years out, and your revenue multiple assumption is more based on how fast can you kinda grow over that period of time. Totally different for what the Harry, you do and what Jason does.

Like, that doesn’t really matter in my view where there’s trading. So I think the market that’s the most stuck right now is that late stage growth, and it’s probably where you see the least amount of deals announced. Databricks would be the one exception of a of a big late stage deal that’s gotten done recently.

No. Who knows? Let me start by saying, since the chairman of the Fed can’t predict the economy, I’m certainly not gonna try. But I’m I’m probably a little bit more optimistic. I’m probably closer to Jason back half of twenty four. I don’t think the activity in the late stage market is necessarily a driver. You pointed out correctly earlier that there’s tons of software companies with a 100 or $200,000,000 of revenue. Some subset of those are potential public companies, and there’s no need for them to do a late stage round to go public.

You it used to be that people would do these rounds just to kinda get a third party validation of value. Let’s take Instacart as an example. What would have been the value for them to do a late stage round before they went public just so that they could tell their employees, yes. Let’s definitively tell you that we’re worth less than our last round. No. The public market became the late stage round. And so I think that that’s really what you’re gonna see.

I think you’re gonna see companies that have a good economic model, that have the predictability that the public markets crave, that have got the balance between revenue and path to profitability or profitability, and the public market’s gonna determine what they are willing to pay for that. And over a three to five year period, they’ll trade based on the underlying economic value that they can drive, which is kinda the way markets should work. So I don’t really see a relationship between a slowdown in the late stage market and the IPO market.

I think they’re kinda right now disconnected.

You know, I’d look at it as that’s gonna be up to the companies. You wanna bet on yourself? If you look at the three IPOs that happened, I believe they all sold less than 10%. Right? So that’s a small percentage. What they were doing was, you know, we refer to it as putting the puck on the ice. The only thing that’s gonna determine ultimate valuation is your execution. Press loves to write about IPO price compared to last price and everything. It doesn’t matter. It literally doesn’t matter.

And by the way, it matters less when you sell six or 8% of your company versus something else. Put the ball in play. You can give your shareholders if, you know, our own shareholders need to get some liquidity, great. Put the ball in play. Reasonable price over time. The long term public managers will find the best position businesses. We’ll build positions over time. I think it’s only goodness. And you’re betting on yourself in the sense that you’re like, I can grow my business at 20%, you know, a year for the next five years, or maybe my profits will grow faster and, you know, that’s one of the things that the markets are interested in.

And there’s benefits for me being public. Maybe I wanna do some m and a. It provides liquidity for shareholders and, you know, and employees. So to me, I actually think the markets are open, but you have to rip the Band Aid off and not be wed to, oh, but in 2021, I was valued at x. It doesn’t matter. If you’re a public company today, that’s that’s in the rearview mirror. The public companies that do that same analysis, rip the band aid off, they can go public if they want to today.

Can I ask a related question? Just curious. You guys neither of you did the last round. I mean, I’m a super fan of Klaviyo for many years. Right? Neither of you did the last round. Right? Did I We’re not in it. We’re not in it. So the last round, I think, was at 9,500,000,000. I didn’t look up the s one, but let’s assume it’s trading slightly down for for purposes. Behind the scenes at the late stage investors, what are they talking about? Have they already adjusted it?

Is there stress around it being slightly down? Just tell us, Cause I just don’t have that visibility about what those conversations happen behind closed doors at the late stage.

There shouldn’t be. I mean, it’s not a surprise. Like, take a look the public market since since that q four of twenty twenty one.

Yeah. What I’d say, Jason, is that I think, unfortunately, off the top of my head, I don’t remember who the late stage investors are in Klaviyo, but let me make a slightly different point. But I think Summit

did the one before and and bought, like, 40%. So I think

they did okay. Summit made, like, seven times their money, so they’re they’re they’re just fine. But we have, like, say, two companies right now that I know of that are looking at doing kind of a late stage round sometime at the end of this year. But here’s why they’re looking at doing it. They’re looking at doing it because in both cases, companies have executed unbelievably over a very long period of time. They have a very clear path to real margins. Neither management team has really ever taken any meaningful liquidity at all over a very long period of time.

And they’re kinda looking to do around to provide some liquidity pre an IPO because I think we’re also in a market where investors or management teams selling into an IPO is a challenge. Right? It’s not what people wanna see. And I think that the most likely investors that are already talking to them are the same people who are gonna buy stock if the companies go public in the public markets, meaning some of the mutual funds as an example. And why is that? Well, these offerings are getting very small.

So if you are a growth manager, you actually need growth product over time. Right? Like, you’re not a value manager. You’re a growth manager. We need to find growth stocks to buy. And once there’s so little inventory and the amount they’re selling is so small and the size of a Fidelity or Vanguard Wellington fund is so big, their ability to buy a position in the public market is actually not that they can’t get much allocation. These actually even become ways for them to build a position in a company that they wanna probably hold for five or ten years.

Now that might be separate from a hedge fund that might wanna flip it in a week. That’s probably not who you want in your late stage round either. Again, I don’t know the specific answer on Klaviyo because I don’t know who it is. But I think the people who are looking at these right now are are looking at these in a rational way. They’re not expecting to make a massive return to IPO. They’re kinda building a position in a company they’re probably gonna stick with.

If you did the Instacart round at 38 or 39, whatever it was, right, What happens behind the scenes? Have you already marked it down so long ago that no one cares? Do you just fire the the partner that put it on the deal? I mean, you think I’m kidding, but in my limited experience and venture, I’ve seen folks kinda get get shown the the door on deals. Right? What happens behind the I mean, it’s a wildly successful company, Instacart. Right? Yeah. No. Look. Thankfully, I don’t think either Woody or I or either one of the deals you’re talking about.

But What do you think? What happens in those partner meetings when Harry or Jason did the we did the deal. Harry and Jason together. We we split the deal. We’re

in a risk business. If all of a sudden you start smacking people on the hand, if they make a mistake in a risk business, what are you gonna end up with? You’re gonna end up with a risk averse set up of, you know, investors, and you’re guaranteed your next fund is gonna be, like, a 1.6 x. That’s not exciting. Yeah. That makes sense.

Yeah. Obviously, if somebody, I guess, did it 20 times, like, at some point, but I think that I don’t I don’t think anybody’s gonna escape 21 without having made mistakes. Right? Out of any investor, no matter who they are, no matter what their reputation was, no matter where they are on the Midas list or some other list, you know, they’ve made mistakes. Woody’s made them, I’ve made them. But I would tell you that the ones that we’ve made in ’21, a lot of them are marked down substantially.

So if they did a follow on round or they went public, it’s not gonna be a surprise.

It’s all been internalized at this point. Right?

But this is the the point, Jason. It should have been. And, yes, there are people that may be living in the past saying, well, you know, government’s still doing well. Why why we change the, you know, the multiples? Just look at the public markets. So anybody that has a methodical valuation process, things are mark to market or as much to market as, you know, the prime market can be.

I don’t. I think this is the the same when you have small offerings like that. Small changes in volume can have, you know, massive impacts. What’s happened since all those guys went public? You had the fed comments. Ten years now over four and a half percent. I think a lot of it’s macro. I guarantee you, and I’m not a trader or anything, but I guarantee you that the short interest is probably off the charts on every one of those. So I wouldn’t say at all that the stock performance is indicative of the underlying companies, but as much about trading volumes and how certain people are approaching them, those opportunities, small float, you’re gonna have lockup releases in the future.

We’ll short against those distributions in the future. So I I understand the comment. You know, we gotta have to start somewhere, and I personally think let’s see how the companies report. I would expect that the companies will have been thoughtful about this, and they will, you know, continue to report solid numbers. But the fundamentals, again, is valuation is only determined by your performance. And going public in a market like this, you’re betting onto yourself. So, yeah, it’d be great when there’s more volume and more liquidity, but I don’t look at this as a failure.

Again, you may not have as many people that are lining up to do this because everybody thought maybe the these all the stocks would shoot up by 40%, and then there’d be a line out the door. It’s just gonna be a little bit harder, and I think the macro is at the consideration.

Yeah. I also say, Harry, look, look. You could wake up in the morning and decide the glass is half empty, or you can decide the glass is half full. We went over a year without any tech IPO. We went about a year without any kind of meaningfully large strategic m and a, and we went through twelve months where every infrastructure software company was talking about cloud optimization, which is driving down their volumes. Right? If you look at the last quarter, that’s kind of bottom. They just start moving in the right direction.

Cisco just bought Splunk. You had three companies go public at real scale, which are real business models, not companies that don’t have business models. These are companies that are profitable, good companies. Maybe Instacart’s not there yet, but it’s on the path to getting there. And so, look, I look up and say that that to me is a glass half full. But if somebody wants to wake up and say is the glass half empty, that’s their prerogative. But I I actually look at it much

more like Woody does. My question to the group is this. For the sake of the larger is the flip side of the Bill Gurley point about direct listings and efficient pricing. What if Klaviyo had decided to IP I’m just looking today. Klaviyo is at 36. Okay? And I I think going to Deven’s point, there is nothing to knock Klaviyo other than the Shopify dependency. Okay? Maybe a few other things. It doesn’t get much better folks than 600,000,000 growing 60% profitable with almost a 120% NRR from SMBs.

I mean, you can’t find a better company, but I think it was priced to perfection around or priced to optimization. Should it have IPO to 25? A company leaves a bunch of money on the table or take some dilution, not cool, but the markets restarted. Right? Should you take one for the team is the question. Because if everyone made 40% on Klaviyo, would people be rushing for another 30 or 40 SaaS IPOs?

Maybe. But you made the right point. Because if it had that happened, we would have five articles about the billions of dollars that were left on the table by Klaviyo shareholders, there’d be four editorials about the IPO market scam. Right? So, like

But would it be better for as growth investors, would it be better for you guys? Because would it help the rest of your portfolio sort of create liquidity in the market?

When other companies leave money on the table and have great aftermarket performance, I’m not complaining, if that’s your question. Sure. That creates more sizzle and institutional investors, mutual funds, and others who are buyers are sitting on a portfolio that’s up, which gives them more confidence to buy the next issue. But at the same time, you look you have to expect the companies are gonna try to be reasonable about their pricing. But I also think don’t underestimate Woody’s point. There’s a lot of macro uncertainty even over the weeks that these deals were getting done.

In a different world, that level of macro uncertainty, these deals wouldn’t have gotten done at all. For sure.

Yeah. You’re gonna go public, it’s gonna be volatile, but I’ll still stick to my point, which is ignore the noise, focus on your business. The only thing that’s gonna determine your ultimate valuation is how you perform. You put the puck on the ice, you’re gonna start being able to you know you know, the public market wants. Oh, Harry is the new CEO. Let’s see how he does against his guidance. Like, does he understand his business? Has he communicated well? Start the process.

you step back, this is a remarkably fundamental trend that’s going to have significant impacts. We have not made any specific investments, although I would say 100% of our companies are leveraging AI in lots of different ways, whether it’s, you know, how you touch the end customer or how you make some of your processes more efficient. This is the positives and negatives of the business that we’re in. We can say it’s a frothy market and this is crazy. People are gonna lose their money. They’re gonna boop some of the bets that are made today that we’ll all look back on and say, god, we should’ve known that.

It was AI was you know, at the beginning, why didn’t we put our money in there? We could have made, you know, x return. That is the nature. It’s not an area that we have made any direct investments in. But a good reminder, the reason that people get excited about technology is it can have remarkably fundamental impacts on consumers and businesses alike.

Deven, how do you think about it? We have been active in AI, but ironic so if look at fund twelve, our most recent fund, like, I think about seven or 8% of it is invested in AI companies. Ironically, almost zero of it was invested in 2023. Almost all of it was invested in 2021 in more AI infrastructure companies as opposed to the LLMs. And it might be the one category where pricing in ’21 was better than the pricing in ’23. But the only category for that It’s a good quote.

So I think that and like Woody, almost every portfolio company is implementing it within their portfolio. Look. We think right now in ’23, the valuation we’re in a hype cycle, and the the valuations are way ahead of where companies are. You’re seeing companies who’ve raised money as recently as six or nine months ago who are already being impacted by something developed six months later. So while we’re spending a ton of time on it and we’re getting smart on the space, we’re being cautious this year just given where valuations.

Can I ask a real life example? But I literally had a board meeting this week. Here’s a question about efficiency day. SaaS startup, SMB, over a 100% NRR from from SMB, so pretty good. Fifty fifty zero. 50,000,000 ARR, 50% growth, no burn. Okay? But not a 100% growth, not 90. Yeah. Is that growth fundable? What’s it worth? Can you give us I know you don’t want to, but can you tell us, is it fundable for growth? Yes. And what’s the most it would be worth if it’s not AI?

What’s a $5,050.00 worth in today’s world? Certainly probably worth the Klaviyo multiple.

Right? That’s an interesting insight. Yeah. And so it’s certainly worth the Klaviyo multiple. If you have those net retention characteristics in a big TAM, like, you know, there’s a lot of ifs, which I don’t know the answers to. What I would say is that deals will get done at even north of that multiple for a high quality company that has a lot of runway at a big market because I don’t think investors are gonna assume that everything’s gonna trade for six times revenue till the end of time.

Now I don’t think people are gonna also assume they’re gonna trade at 17 times revenue any. You have to have some rationality to what you can assume from a exit standpoint. But at some point, the real question, Jason, is how long is this 50% growth compounding for? Because my guess is but in year five, is it compounding at 50 or is it compounding at 20? If it’s compounding at 20, then maybe eight’s not a crazy multiple. If it’s compounding at 50, it’s really undervalued. I don’t know the answer.

I haven’t studied. It’s a good a good answer.

If yeah. Is the question what which one do I own? I don’t go down.

do stock price just because market cap can be there’s like 88 calculations for market caps, aren’t there? But it’s 36 today. So you’re asking, will it be plus 50% in a year? Is that the bet? Yeah. That’s that’s it. So it’s gonna be what is that? That’s

The question to me is what should be the underlying return in growth? That’s really the question. The company’s public. In theory, their growth rate, unless the market really inefficiently priced them, should kinda compound it kinda where the market compounds. And I don’t have differentiated knowledge to say it should compound less or more, but I’m probably not going into any company assuming that I have a 50% IRR. Like, I I would have to really know something specific that would make me feel like there’s something I know the market doesn’t know that would make me have conviction that something was gonna have a 50% IRR.

I don’t know anything. That doesn’t mean it won’t. But since I don’t know anything, I’m gonna assume that it won’t have a 50% return because I am not gonna assume the public market is gonna have a 50% Woody?

The way that I would think about it is if the companies execute, I think there’s probably more upside in some of the multiples than downside. I don’t necessarily look at some of the multiples in you know, certainly with some of the newly public guys, I don’t think they’re remarkably overheated.

K. Here’s my bet. I’ll let me simplify it. Maybe there aren’t any takers. I’ll bet $10 to anyone that takes it that Klaviyo, twelve months from when this episode goes out or today, whatever Harry says, trades at 20% or higher from where it is today. I’ll bet $10. It’s 20% or higher. I’m gonna take Deven’s point about Matt. I can’t figure out everything. I wouldn’t bet against that. You won’t take that bet.

committee on personal We’re on the same side of this bet is the problem. My investment committee on personal bets is my wife, and she would not allow me to take any such $10,000 bet. So I’m not gonna take a bet, but, you know, I’m certainly comfortable with the 20 percent assumption, not 40, I don’t think.

Okay. We’re all betting who’s gonna pay the other side. We’re all betting we’re all betting we’re all betting Klaviyo’s gonna be 20% or higher. We’re all hoping. We’re all optimistic 20% or higher in twelve months. Right?

market. It’s not even growing, is it? Isn’t ARM shrinking? Well, the only thing is that you have one thing, which is you have a massive shortage of chips generally, and there’s massive demand because of what’s going on in AI. And ARM and everybody else are trying to come up with some way to position their chips for that market.

Yeah. Remember, all all these things, it may not be fundamentals they trade off of. It may be the fact that very little liquidity is out there. And if people are trying to get liquid that have been long term investors, ARM is very closely held, that could impact, you know, the stock price more than anything else. What

Yes.