Did Figma Kill M&A Markets in 2024

Yeah. It’s great to be here. So I’ve been in the the venture world for, let’s see, eight, nine years now. I’m I’m currently at Altimeter Capital. I was at Redpoint Ventures before that. Over at Altimeter, we have two different strategies that that we run. We have a public investing strategy, right, that kinda looks, acts, and feels like a hedge fund, and then a private investing strategy, which looks, acts, and feels like a venture fund. On the venture side is where I spend all of my time.

Our primary focus is partnering with companies right around that product market fit point and then beyond. And so whether that’s a Series A, a Series B, a Series C, whatever it might be kind of around product market fit and then scaling beyond it is is kind of typically where we look to partner with founders and businesses.

I’m a little bit older than than Jamin. I I’m entering year ’28 of doing enterprise software venture capital at the early stages.

Yeah. So, you’ve accomplished a lot in a short time, Harry. I I’m the founder of Boldstart Ventures. Started that in 2010. And our idea is to be the, inception stage partner for founders. Inception stage investing for us means collaborating with founders well before they incorporate, helping them iterate on their ideas before they launch, and leading that round upon incorporation so they already know who their first six hires are. They have money in the bank. Don’t have to waste time. It really saves six months of time to kind of get going.

And I also say inception because it doesn’t mean it’s a pre seed round because a third time founder is gonna raise $10,000,000 out of the gate and they may very well deserve it. Whereas a first time founder may get one. So that’s kind of what we do. We also have an opportunity fund that allows us to back the truck up in later stage companies like a Snyk or a BigID and companies like that as well.

You nailed it. Everyone was like, hey, let’s stop the bleeding. Let’s extend runway. Two is let’s buy time. And then last year was the year we got to see whether these enterprise software companies could execute and grow their businesses. But the years of companies at the later stages going 100% year over year are over. Two is everyone got fit financially in terms of trying to get to cash flow breakeven. And I think now this is a year, Harry, that you’re saying like, shit. If I’m only growing 20% year over year and still burning cash, I don’t know if I have a business.

What the hell am I gonna do? I need to figure out kind of do I buy another company? Do I exit? Can I get to cash flow breakeven? So so this is the year that this shit’s hitting the fan because, you know, you can only extend runway so much, and it doesn’t mean much if you’re not growing.

If I had to summarize that 2021 period, it really was we crammed five years of fundraising into an eighteen month period. And and I actually I have a I don’t know if we can show charts if it’ll work if I share my screen, but I I pulled together some pitch book slides. You can see on the left hand side, it’s kind of aggregate seed series a capital raised for US based companies. And then on the right hand side, it’s the same set, series b, c, d, and e stage businesses.

Right? And I think what you’ll see here is we kinda we had a trend line that went crazy in really 2021 and probably the first half of twenty twenty two. And now in 2023, we’re down 90% from where we were at the peak, but we’re really just back to the 2016, 2017 trend line. Right? And if seed and series a was around that $56,000,000, a billion dollars a year, and series kind of b through e was around that 30, we really took that. We multiplied it by five, and we funded that in an eighteen month period.

And I think there’s a lot of implications from that. Right? If we think about how businesses were built in the good old days of four years ago, companies would raise a round, they’d hit a milestone or two, and then they’d raise the next round. And that’s typically how the cadence worked. In 2021, in the period of ZIRP, everyone was risk on, you know, investors across the board, whether it’s private, public, definitely venture. And I think what a lot of folks said was, hey. Those milestones we used to require, we don’t require them anymore.

We just want to invest in companies. And you had companies raising Series B rounds, Series C rounds that might not have hit the typical milestones a Series A stage business needed to. And at the same time, the valuations were super high, and and it basically created this setup where if the world ever shifted to go more risk off, now all of a sudden, if you wanna raise an up round, it’s not just do you wanna hit one or two milestones. You gotta hit seven, eight, nine, ten milestones, and you gotta grow kind of 10 x to do it.

And, you know, and lo and behold, what happened? We had this big big macro slowdown. Growth slowed. Everyone started missing plan. It got hard for everyone. And I think the TLDR of coming out of this 2021 period is companies who raise those big mega rounds are pretty much all in this overvalued and underperforming bucket. Right? And underperforming relative to plan set in 2021. And there are plenty of companies who are saying, hey. We still have lots of cash. Everything is gonna work out. Let’s kick the can down the road.

Then you have some smart companies that are asking themselves these hard questions that I think we’re gonna talk a little about a little bit about today. Right? Do we have a real enduring business? Those hard conversations are undoubtedly really kicking into gear now.

But, man, I gotta tell you this is that I think the inception rounds were off the charts last year because there’s data from Carta that shows you that if you look at priced rounds from q one of twenty twenty one compared to, let’s say, q four of last year, the only round that increased in valuation was the seed round. You have a factor of late stage investors maybe pausing. Multistage funds decided to slow down the growth, and they said, gee, why not kick the can down the road as well?

Let me invest in two founders in an idea. I don’t care what price. It’s not gonna be at a 100 x multiple. The cheapest entry price for winning company is gonna be that first check. So maybe I’ll price it at 40 or 50 post, and it doesn’t really matter. But Harry, it does matter to us when we have a business model that is predicated on, you know, trying to find these great opportunities at at attractive, you know, prices with founders. Right? So so that, I think there’s a massive bubble with with what I call inception stage.

I think the question really is is what is dying relatively? Just because you have twenty four or thirty six months of cash doesn’t mean you have a business. This is a year that boards and founders should have honest conversations. There are gonna be a lot of boards that just don’t have that conversation. And the honest conversation is gonna be, hey, if I keep doing what I’m doing, and founder in particular, what does my business look like three years from now? A, do I have a business?

And b, can I grow into that valuation ever? And if I can’t, if I can never grow into that valuation, should I keep doing what I’m doing? Right? And then if I have to go out and raise capital at one fifth the last price, maybe that’s the best thing because we think that they can eventually build a real good business down the line and whatnot. But I think those conversations are not being had. They must be made now.

There’s no reason to wait three or four years from now if you know that you’re only gonna be worth one third of what you’re gonna be at a multiple instead of a 100 x at 10 x or 12 x four, which is gonna be a really good multiple.

First, I think you have to ask yourself very basic. Hey, founder. Do you have the energy and conviction to keep going? Like, do you really believe in what you’re doing? Because if they don’t have the energy and conviction, then I think it doesn’t matter what you do. You know how many founders been out of five, six, seven years right now sitting on valuations that are probably one third kind of where they’re at? And maybe they’re tired. Right? So sometimes you may have that conversation with the founder and they may feel relieved.

You may say like, hey, one of the later stage investors in this round is okay getting their money back. Sometimes you hear this sigh of relief, like, oh my god. Like, oh, wow. Like, this would be a win for you. And by the way, early stage investors, you may make three times your money back. And by the way, founders, given, like, how much cash you have in the balance sheet right now, maybe you only spend half it, maybe you still have 40 or $50,000,000, that can be distributed back if you have an exit.

So if we work on finding the right exit opportunity for you, a, you can have a graceful opportunity to say you sold your business. B is you can not have to worry about growing into some insane valuation and the later stage investors will thank you. And three is depending on where you’re able to land the plane, let’s say, with the right company, you might be able to get some equity value for yourself and your employees and also get a retention pull. So you can create situations where it’s a win win win, but you have to have that conversation.

And sometimes the founder will say, fuck you. I’m gonna keep going, and it doesn’t matter. And that conversation could take twelve months. But I can tell you this, if you don’t have the conversation, then you’re not doing a service as a board member or investor for that founder, period.

But by the way, Harry, I’ve had them I’ve had founders say fuck you, and then by the way, when they exit, they’re like, thank you very much. Like, you just saved me time. And so they’re always gonna say fuck you. Why why would they? Because because if they wanted to do it, they’d come to you first and say they wanna do it, but they’re gonna say fuck you. But if you don’t get the fuck you, you’re not doing your job for them too.

This is why these processes end up taking twelve, eighteen months is because it’s not twelve, eighteen months of negotiating with an acquirer or figuring out how to do a dividend back of to the preferred. Right? It takes eighteen months because these are really hard decisions that are often very contentious in the early days, and it takes a long time to get the early stage investors, the late stage investors, and the founders, like, all on the same page in agreement that this is the right thing to be done.

And I think you do have just a class of what I would call founder friendliness that isn’t really the true founder friendliness. Right? To be a truly founder friendly investor and board member, it is about having those hard conversations. It’s not about shying away from conflict.

Can I just take one step back, though? Yeah. I know that a lot of the companies right now, I just wanna be really clear, that these are the companies that maybe have $5.10, 15,000,000 of ARR. Maybe they’re priced at 300 to 500 to $1,000,000,000 of of valuation. But there’s a different part, Harry, on the earlier stage of the stack. Wanna Well, this is this

Let’s go back to that. I mean, usually in those situations, investors like us aren’t asking for our money back in a lot of those. Ed,

I’m not saying it’s bad to ask for money back. I’m just saying, so in that case, three years after you’ve tried three times, I’m just saying that, you know, once again, it’s it’s it’s the founder and the conviction that they have. And if they can get the team rallied around kind of what the next opportunity is, then, yeah, you keep going. And if not, then you look at alternatives.

There’s one variable here that is becoming a lot more important that I don’t think a lot of people really thought about, founders or investors, which is the size of the prep stack. One of the downsides of raising these big massive rounds is now all of a sudden your prep stack is really big, and that really starts to come into play when we think about an acquisition. What price can you truly be acquired at, and is it greater than that pref stack?

And the reason this this matters, right, is I think when and, again, just to speak in broad strokes here, you have a lot of late stage investors who I think the typical stereotype is they can jump around and and how they view the world, like, they can have loose conviction. Right? At the first sign of things not going well, they’re gonna wanna jump ship, pull the rip cord, and get out and maybe kind of atone for some of the sins of the high valuation rounds. And, yeah, they can flip flop.

I think on the flip side, you know, the very early stage investors, there’s very different dynamics in play. Right? I’d say the earlier you go from a fund dynamic, the more your fund returns are driven by bigger power law outcomes in a zero x, a one x, a two x. It’s all the same thing. Right? It’s either it’s at a 100 x or it’s not.

Let me share. Let me share something with you. And I think this just I can’t wait to see what I This just sets data here. I loved it. This just sets the stage. And and I wanna walk through the math of a 100 x ARR round at scale. Right? And what we have here are the median multiple for public software companies going back to call it the beginning of twenty fifteen. And what you’ll see is on average, software companies trade around seven and a half times forward revenue.

Right? You can ignore that twenty twenty, twenty twenty one period when interest rates went to zero. And so companies on average are going to exit at seven to eight times forward revenue. Another cut at this data, looking at, you know, what percentage at any given point in time, what percentage of public companies are trading over 10 times revenue. Right? There are points on this graph where it was zero. There was not one public software company trading over 10 times. Right? There was a period of time very recently where that number was low single digits.

Some of the challenges of these 100 x ARR rounds and I’m not talking about a 100 x valuation when you’re at 200 k of ARR. I’m talking when you’re at, you know, 10 plus. Right? And your valuation is into the billions and you’re raising at a 100 x multiple. If you’re going to exit at 10 times, and 10 times like the point of this slide, 10 times is actually you know, you’re a top 15% public software company if you’re getting a 10 x plus multiple. If you wanna go from an entry price of a 100 to an exit price of 10, you’re going to have dilution along the way.

Maybe you have 20 to 30% dilution along the way. Just to get back to the price, to the valuation that you were given, you have to grow your top line probably twelve, thirteen x. Right? You know, you’re gonna have a little bit of dilution, right, that 30%, plus the multiple compression from a 100 to 10. That’s really hard. Right? And as we’ve seen over the last few years, growth has slowed. And so as growth comes down, multiple also comes down. Growing 13 x just to grow into your valuation, that’s that’s really hard to do.

And if you’re a late stage investor and you wanna get a three, four, five x return, you gotta grow forty, fifty x your top line from that initial investment. So there are just a lot of these investments that I do think are are in a tough position in terms of, like, where their valuation was relative to where the business is today. There’s the vast majority of companies who raise these mega rounds in 2021 will probably never be worth at any point in time, right, the valuation that they were given in the public markets.

And and that’s just this inherent challenge of when you come to that realization, what do you do?

A great example would be that at the end of last year, I’m not in the room with Loom, but that last round valuation was at $1,500,000,000, right, that was led in 2021, and they sold for $9.99 or something, $9.50. Right? So, clearly, the last investor that underwrote that was probably thinking, I’m gonna get a three x on this thing. But instead, they decided to vote with the founders to sell the business. I’m sure they got their lick pref back. And I think, basically, the loom might have only raised a few $100,000,000.

So there’s $600,000,000 of delta sitting there or, you know, between the founders, the management team, and everything else plus some incentives. So that’s the situation we ask the question is, are some late stage investors saying, yeah. Maybe one x is great, and I can reinvest that. I’m seeing more of that based on the companies that I’m in, from the people that I’m talking to anecdotally. I’m not a late stage investor, but I do know from the boards I’m on, I can see a lot of people starting to get wind of that.

And then figuring out from a portfolio triage perspective, which are the third that may, to Javin’s point, are the ones that are gonna grow into the valuations or are are almost there where they they may just need a little bit more com cash at a flat round so that I can actually create a return.

Look. I I think don’t make the cap table a risk to your business. Right? Build a business the old fashioned way. Raise smaller amounts of money more frequently that are more milestone based, where when you raise a round, you know what you’re signing up for for the next eighteen months, and you feel good about getting there.

I see Harry laughing. I see Harry laughing because he knows when you’re throwing when you’re throwing a thousand x Yeah. It’s gonna be hard to say now. It is. And I know you’re laughing about

I think that last statement, though, is where the rubber is gonna start to meet the road. Right? I think there is this assumption that from a from a fund standpoint, not a company standpoint, we’re always going to be able to raise. We have the brand. Investors are always asking to, you know, get into our funds. That is the part of the cycle that we haven’t gotten to. Right? We haven’t gotten to this I

I mean, I frankly think that this class of companies that are started, I’m talking about we we did eight net new investments last year, and we only did three the prior year with our largest fund yet because a lot of founders getting religion. I don’t need to tell founders you don’t need to raise 6 or $7,000,000 at the highest price possible anymore. They know that if they set the bar too high from the very beginning, it’s gonna be hard. We we’re moving from a transaction driven world to a relationship driven world now in the sense that since things are taking a little bit more time, founders, as much as investors, need to get to know who’s joining their boards right now.

I think the OpenAI thing was the best thing that ever happened in the sense, like, enlightened people to say, who’s my board member? How are they gonna stick with me through good times and bad times? Because it’s gonna really matter in the next few years. So everything we learned during ZIRP is gonna is undone right now. Unless you’re an AI company getting a thousand x, and I can tell you that if a founder had that, it’d be hard for them to say no. If I was in their shoes, it’d be hard for me to say no.

I’m just being realistic. Right?

Everyone did. I mean, we played the game that was on the field until until the chair stopped, and we can say that we did better than others or not. But the game that was on the field, you can you have to play. Right? So one other thing I would say to Jamin’s point and your point is that let’s move to a world of exits that you no longer have mega exits anymore. Like, for example, I sat through the customer thing. It took us sixteen months from signing to sell to Meta because of antitrust regulations.

Right? Ed, Ed, would that would that have gone through today, do you think? Fuck no. No way. And by the way, it had nothing to do with anything other than they they hated Zuckerberg. Kustomer was a business to business software thing, and you had Ireland to go through. You had the EU to go through. You had The US to go through. Right? So that was a, you know, reportedly, according to Bloomberg, over a billion dollar exit. But the point is is that, let’s say those go away.

In a world, they give 300 to $400,000,000 exits. The world where Palo Alto repeatedly buys companies for $1.50 to $600,000,000. How much money can a company take in order for investors to make money? What does that mean for late stage investors? Jam, I’d love to know kinda how you’re thinking about it. How you choose Yeah. Which are the ones that are gonna be the $3,000,000,000 companies? Because please tell me so I know we’re not gonna be setting down the plague. Early guys will do well as long as they’re not paying 50 to 75 bree for some of these inception rounds.

If they exit at 3 to 500, but you need more of those to return a fund. It changes the dynamics of everything where ownership matters and choosing what what can go along matters. How do you know, like, when a company is doing 5 to 10,000,000 when when you know that’s gonna be that, you know, multibillion dollar, you know, at scale business?

I think the realization that everyone has had recently is, look. There really just aren’t that many special markets. And in those special markets, there’s not that many special companies that exercise the right to be special. In 2021, everyone was funded indiscriminately as you are going to be a public company. You’re in a market that’s big enough. You have a product that’s differentiated enough to support a public market type company. And when I say public market type company, what does that mean? It’s you are sustaining growth at a $102,100,000,000 plus of ARR.

Right? Sustaining, meaning you’re growing, call it, thirty, forty, 50% plus. The universe of companies that can do that is very small. And when you raise a round when you raise that Series A round, the thing that I always tell myself is, okay. Is this a business that is gonna peter out at 50, or can it get to a 100? When you do that Series D, Series E round, the question is, is it not a business that is gonna peter out at 50? It’s is it a business that can get to a $102,100,000,000 of ARR, still growing 40%?

And there’s just not that many markets with products that are differentiated enough to get there.

Basic ones. Right? The market just wasn’t that big. There were some early adopters maybe in Silicon Valley that were using your product, but the reality is is you never really broke into the enterprise. Right? You never really broke into where the big dollars were, and it’s hard to make the unit economics really work in scale when you’re kind of servicing these smaller customers.

Yeah. It’s definitely a huge ingredient. And you see some of the most successful public companies today, the CrowdStrike of the world, the Datadogs of the world. Right? It’s exactly what you just said. It’s moving from a point solution to a platform. Like, that’s really hard.

One clarification. As someone who does kind of like that gross stuff as well, I don’t think anyone’s happy with a one x. Right? It’s a little bit of, hey. Is a one x in the context of what happened over the last few years an acceptable type outcome where you can recycle that money back into new opportunities. I’ll go back to I listened to this podcast with Doug Leone, which I just absolutely loved, and he talked about the fun a fund that they had. I can’t remember if it was a 2000 or more of a 2008 type vintage, where they had to kinda kick, scratch, and claw to get from a less than one x type fund.

Right? I think he maybe called it a point three or point four x fund to a 1.9. And what he said was what you can’t do as an investor is blame vintage and move on to the next fund. They fought to make every fund a positive vehicle for their investors. And one way to do that is through recycle. It’s through taking investments that maybe didn’t get to the exit you hoped for, that three x. Maybe you got that one x, taking those proceeds and recycling it back into into new opportunities.

Right? And so I think what you do have is a lot of investors who are thinking now, hey. Is that a good thing? Should we be doing that? And I I think that can be a way of finding returns for investors in funds that were more challenging vintages. But I think the wrong answer is giving up, blaming vintage, and and moving on.

I would add to that is that if you look at funds, everyone talks about kind of that outlier, especially at the early stages that drives kind of performance like the one to two outliers that drives that massive performance. But if you don’t quit on the founders and work with the founders on the less on the bottom third, you could probably cobble together another point five to point seven five x in some of those exits by returning 75% of cash back on certain deals. Maybe getting a 1.3 x where it’s not that heroic, and then maybe a two x here or there.

But you cobble some of those things together, that can be the difference between a top 25% fund or

I literally just had my annual meeting in November. I had the same prior realization that you do, Harry, is that maybe we could have sold some a little bit down sold a little down kind of on the way up instead of leaning in 1000%. Right? I mean, those are the balances that you have to kinda look at over time.

I’d say probably two thirds work out more positively than negatively, but the ones that work out can be outliers. And everything is not always up and to the right. And when you fund the things that are way ahead of the market, that are kind of new categories or just kind of doing things completely different, it always requires something extra. A guy from Snyk, we funded him three times before he got his a round done. No one wanted to fund that company. They’re like, why is he focused only on JavaScript up in source?

Why is he only focused on developers? I have a list of a 100 firms. I’ll pull up the spreadsheet one day, and I’ll show you all the firms that said no multiple times over. K? That’s one. BigID, three rounds before they got their a round done, and then Zuckerberg was sitting in front of congress testifying about privacy. And then all of a sudden, they raised a bunch of money, and and they’re doing very well. Security scorecard? Oh, the market’s not big enough. It’s not this. It’s not that.

They did over a 100,000,000 of ARR last year, and they required a bridge around between seed and a before Sequoia jumped in. And the final one I would say is even Kustomer, we required a bridge between a and the b because people are like, you just need a few more check boxes to compete against Zendesk before I even believe in your innovative kind of new way of doing things. So all of our best winners, I can’t tell you any of them were the ones where he came and said, hey.

First of all, those founders are just the lights out founders like the the Airbnb’s because they aren’t until they are. And then two, there’s always gonna be a come to Jesus moment. And if you have some insights and you have some trust and the founders have conviction, the chooses founders so much fucking conviction. And you watch them and you see the customers kind of looking at the product. Maybe they’re not signed yet, but you talk to them and that you see the energy, you lean in.

You’re not gonna get everyone in them right because I can tell you a bunch that didn’t work out. But if they do work out in the margin, that’s where you get that extra delta.

Yeah. There’s kind of three buckets of mistakes folks can make when kind of investing at the stage that I do. Right? One bucket is a simple one, like, do we just pick wrong? Right? Like, was the company just, like, not in a good market? Did the product actually not work? Did did we pick the wrong company? Then there is, did we forecast wrong? Did we have expectations for how the business was going to perform, and were just really off? Obviously, kind of related. And then the third one, which is maybe only relevant in the 2021 period because before that, you didn’t think any anything else, but did we get the exit multiple wrong?

Those three buckets of mistakes, I think, were very common. On the the latter end, there were folks who said, hey. These public multiples twenty, thirty, 40 times revenue, like, that’s a new normal. Like, we can underwrite to a 30 x exit multiple, and then we’ll make money. Right? Like, it’s totally crazy in hindsight, but I’m sure there were people who made those types of mistakes. I think the mistakes that I made, right, when I reflect back was that middle category. Right? It was forecasting wrong. It was saying, hey.

I think I’m identifying a good market and a good business, but I had an expectation for growth durability that just didn’t happen. And part of that was macro related. Right? It got harder for everyone. But part of it was getting back to the conversation that we had earlier, which is there are different things businesses need to get done and to achieve that help them sustain growth at 50,000,000 of ARR, at a 100,000,000 of ARR, at a 150,000,000 of ARR. Right? It’s turning that point solution into a platform.

It’s is that point solution, does it have enough what I call strategic real estate where you can truly layer on other products around it and build the foundation of a platform? Or is your point solution actually part of someone else’s platform that will get layered into someone else’s platform and you don’t have the strategic real estate? So I think not accurately forecasting forward was the biggest mistake that I made. And again, when you’re investing at bigger valuations, like, that is where you can really run into a lot of challenges.

Yeah. Look. Again, I think this this does get back to in that 2021 period, there were plenty of businesses that if you just looked at their historical performance, you’d say that is n of one. And if we kind of project that forward, it’s the next thing. And I think there was a case to be made that, hey. Virtual events are going to be an enduring part of the future. I think what ended up happening in practice was COVID went away, and there was just tons of pull forward.

There were lots of businesses that no longer made sense that, right, were using that platform that churned off, and and that turned into a situation where you had a business now that probably no longer made sense in the new world, which was really the old world that we lived in. And so I’d say the mistake there was thinking that, hey, this thing that hit insane product market fit, that had the best product market fit, you have to go back now, and a lot of companies are doing this.

Did we really have product market fit? Right? Or was it just market fit? Were we just the thing that everyone had to grab and use because they all needed it all at once, but maybe we hadn’t actually built the thing right? And now that the world is coming out of that and there isn’t that insane market fit, are there alternatives? Are there different ways of of solving this problem? And I think there’s, you know, there’s two sides of product market fit. There’s the product and the market.

And when we had this jostle that was the 2021 period and COVID and everyone was kind of, like, in their homes, I think the fundamental thing that we got wrong there was projecting what the world would look like when we come out of COVID. It ended up there was not product market fit, right, coming out of COVID. And what do you do with a company that might not have it? Maybe kind of the best I can do on on that one.

I actually hear this conversation going on about platforms and during companies and stuff. I also don’t wanna scare kind of founders away either because I like to say it’s not the TAM you start with, it’s a TAM you exit with. I don’t want a founder coming in telling me I’m gonna start a platform company. What’s 10 person company is gonna come out and sell a platform and compete against the giants? Right? I need the founder to come in. What what about Rippling? Well, he’s a special guy.

Look at him. He did something before. Right? I mean, did something over. He knew what he was doing. He started out with a massive kind of checkbook when he started. Right? That was a big round. So he’s a special founder. I’m talking about your average everyday founder that no one even knows about. The way you do it is that, I like to say, you’ve gotta be able to zoom in. Zoom in on the end user. Zoom in on how you make their life 10 times better with your product and how you can uniquely solve that problem.

So you sell the product. But then you can market the vision to us. I like to ask the question, in three to five years, if everything went right, what does this look look like? And you then you get the idea of like, hey. I’m gonna start here, but I may I could jump into three other places. Right? So I just wanna tell founders that I like them to start kind of on a narrow path with a vision that they can go bigger, and I just don’t know which direction it can go.

I just don’t want to scare them to think like, hey. I need to find a platform from the very beginning because it’s the very rare founder that can go and do that and choose you a second or third time founder, and people are like, let’s give that person $20,000,000. Right? And so And Parker is incredibly unique as a Oh, the

he was an intern for me once? No kidding.

was an undergrad at Harvard.

From a regulation standpoint, it is really hard to see any large scale m and a right now in this, you know, administration in this environment. Like, that is a a really hard path that I think every company now, right, looking at kinda like the Figma, resolution is saying, do we want to embark on a big distracting distracting to employees, distracting to customers’ process if the end state is most likely a no go? And I think a lot of boards and founders are saying, it’s not worth it.

We don’t even want to embark on that potential. And so right now, like, that door is is is maybe closed. For the smaller scale m and a, right, I think this is why it’s so important to start having these conversations now with these companies. There’s only so many acquirers, and the reality is any acquisition, small or large, takes time and energy, and then on some level is a distraction. Right? You can’t have Palo Alto isn’t gonna go acquire 10 companies, right, in the next year. They might acquire a couple.

Same with all these other, like, large acquirers. And so when it comes to these acquisitions, you will see them. You’ll see two different types of them. You’ll see acqui hires, which is really more of a, hey. These are special people that we want to bring under our 10. Or it is a the sneak acquisition playbook of there are tangential products to what we offer that we think are very strategic to the overall thing that we are building. Right? Snowflake just announced an acquisition of a company called Samoa, which is a business that we work with.

Right? They viewed that product as very accretive to their overall platform. So I think you’re going to see a lot of companies looking to be acquired. There’s only so many companies that can be absorbed, and I think that will be a bottleneck, which again is just why it’s so important to start having these conversations now.

I think that’s a great answer. Like, very few huge m and a’s because of antitrust, maybe save cybersecurity, which has national security interest, and those things tend to go a little bit faster. But other than that, no. Acqui hires for public companies, I’d say not really. And I say what happens is if you’re the one product company, back to your point, Jamin, if you’re the one product company and things are going well but not as well as you thought, this is your opportunity because ultimately, it’s a game of musical chairs.

There are so many seats out there available for, like, Palo Alto to buy a DSPM player or some other kind of player. They’re gonna look at five of them, and they’re gonna talk to all five of them. I mean, even when Snyk bought the last company that we just bought in the ASPM space, we talked to three or four. Ultimately, found the team that we wanted at the price that we wanted with the product that we wanted. Right? But because of all the funding that has happened in the last three years, there’s 10 of everything.

And in this gaming musical chairs, there’ll be a couple winners and a lot of losers. The sooner you can get your ducks in a row and have the conversation and say, am I enduring the business or not? Am I gonna be the one acquiring other companies or not? Then you can determine kinda what your fate’s gonna be. Look. We just sold a company right towards the end of year as well. PagerDuty bought Jelly. Nora is a fantastic founder. They wanted to get into the incident analysis space and evolve, and that fit, you know, well.

Right? I mean, they’re clearly looking at some other companies.

It just depends. I I would say it just depends on the situation. But if you have a product that people need and you’re ahead of the curve, and maybe you’re not the best at sales and marketing, but you’re really great at building, you can create some pretty good valuable exits. Right? Look at all the stuff that Palo Alto bought. A lot of those companies had 2 to $3,000,000 of ARR getting sold for two to three, four hundred million dollars. Right? So those are the discussions you have to have, and you’ve gotta be open.

It also goes to not taking too much cash up front because that limits your ability to exit at those numbers. And the final thing I’d say is that we haven’t talked about yet is private to privates. This is where, for example, like the airplane to air table situation. I think, you know, if you look at the numbers, I know there’s a lot of debate online, but let’s just assume that if they only spent half of the 40,000,000, there was $20,000,000 of cash on the on the balance sheet.

So perhaps the founders and investors made some money on it. Right? Maybe they took Airtable at a I don’t know what price it took it up, but maybe they took it at a at a higher price, maybe inflated price that they would have to grow into. Maybe they distributed cash back. Maybe there’s a retention pool. But you’re gonna see more private to private as well. And the reason why that makes sense for a private company is because if you’re a one product company going back to the platform play, you’re gonna go you’re gonna have to buy another product or two and show that you can get out to the public markets with two or three products and that you can be a true platform.

That’s when you buy something, you can integrate it, and you can sell it. So I think you’ll see, while it’s harder to do on the private to private side, there’ll be some more privates coming down the line for some of these unicorns who say, gee, I think the only way for me to go public is to add more products to my platform.

You just sold Atomic Jar to Docker. Docker is, from what you see out there, is a company that can go public the next two to three years.

This just gets back to one of these core themes we’re talking about today. If you get acquired for 100 to 300, the difference in whether you as a founder and your employees can make really good money or make no money can beat the difference of did you raise a crazy round or or did you not? The challenge is they raised $200,000,000, and now all of a sudden their prep stack is really big. They’re sitting on a really high valuation, and that exit path now is a really hard thing to get to because of some of these rounds that were raised in in 2021.

In a world where my private multiple is gonna start to converge more with public multiples, What do I need to do from a business standpoint to get to a kinda two to three x markup? Do I think I can get to those metrics in the next two to three years? Can my market support that size business in this mark? I think asking those questions and knowing, hey. When we raise a round of funding, what are we implicitly signing up for for the next few years? And just being honest Can

The IPO markets are always open. Right? You can always go public. It’s just a question of do you want to accept the market clearing price at that point in time? Companies could have gone public in 2022. It just would have been at a much lower valuation, right, relative to their last private round or or what they were expecting to get. So I would say the markets are wide open. It’s just a question of do you want to go public and do you want to accept the reality of what that valuation means?

In many ways, I think an IPO is a great point in time. It’s a great event. It’s a great transaction for businesses to kind of reset the cap table. Right? All the preferred is converted to common. Your shareholder base starts to turn over. You can innovate in the public markets. I think there are plenty of examples of companies who are able to innovate and kind of like build act two, three, four, like, in the public markets. And so, again, like, I think you will see companies who start to say, hey.

Look. Let’s just reset this business. Right? We’ll take a down round IPO. But guess what? Public stocks go up. Public stocks go down. Private valuations should go up. Private valuations should go down. Let’s reset this business in the public markets. Let’s get liquidity for folks who have been here for a while. If that’s at a down round to our twenty twenty one ZIRP round, so be it. We’ll manage it. We’ll set employee expectations, and we’ll grow from there.

Look. Snowflake was trading at $400 a share. Now it’s trading at $200 a share. Right? It’s it’s still half. Like, despite the recovery we’ve seen in public stocks, right, like, that business is trading at half of what it was trading at the peak. But that are all things that can be worked through. What we’re not seeing, right, if we were wind the clock back re rewind the clock back to kinda 2,008, a lot of rounds that were raised kind of in that period had ratchets, really heavy anti dilution clauses.

And the reality was is if you wanted to go public at a significant down round, the cost to the company in terms of incremental dilution was so high that it actually was in the best interest of these companies not to go public because they would be diluting themselves to the ground with a down round. The reality of the moment we live in today is a lot of these Zurf rounds, they didn’t have ratchets. It was the opposite. They were very light on terms and they were very light on structures.

So you don’t have this dynamic of super heavy ratchets, anti dilution clauses that structurally make it really difficult to go public at a down round. It’s really more about like how do you manage promises you made to employees. Right? You hired people two years ago. You said you’re gonna be worth x. Now all of a sudden, you’re worth y. Like, soon as you lose the trust. I think it’s more of those types of issues versus real structural ones.

Dude, this is great. I I would just say that this also makes you realize who your board is as well. Look. The margin majority of companies that go do go public this year will be down rounds from the prior rounds, especially if they raised during the ZIRP era. It just is a reality. Right? I think the question to your point, Harry, is at what price are you willing to go below? Is it 50%? Is it 30%? Is it whatever? I think part of the answer too, there are some benefits and there’s some negative issues with going public.

Right? Benefits could be you now have a public currency in which you can hire some amazing talent as a public company now because there aren’t many people that wanna work at a late stage company right now unless they know what the price is. Right? So it’s hard to know what my restricted stock’s really worth unless it’s public. Two is is now you have a public currency in which maybe you have three or four companies you wanna buy. And once again, the buyer now and the buyer, you know, as a public company can go out and talk to a private company and say, hey.

Look. I’ve got gold stock that’s really valued, and within six months, perhaps you can sell that thing. So those are positives, right, to really accumulate and accelerate that platform play. The negative would be you’re gonna have to accept for the most part that it’s gonna be tough to get an up round if you did raise during 2021. I mean, there’s pretty much unlikely that the valuation you raised down in 2021, you probably raised a really great multiple at that point in time.

others I think people have been prepping for the last eighteen months, Harry. Like, the people are ready. So I’m just saying the ones that had thought about going public, like the of the world, you know, all the they’re almost all IPO ready now. It’s just a matter of do they wanna file confidentially or not. So I’m talking about kind of the the next herd.

No. From what I know, a, I’m not on the board, but two is I heard that their expense line is still, you know, relative to the growth is still kind of not. But if you’re gonna go public, I think you’ve gotta be cash flow breakeven. I think you have to have 30% plus growth, which is probably what high growth is right now. And, you know, you’ve gotta be moving towards the rule of 40 or 50, my opinion, with slanted more towards growth than you are cash flow breakeven.

Right? So I think those are the things that you’re gonna need. But, yeah, as I said, Jamin could probably comment better than than me on that.

I love listening to podcasts, especially podcasts with some of the greats, right, that have been in the industry for a while. And there’s a recent podcast that Bill Gurley was on. They had a little bit of this discussion, which was, hey. Well, the trouble with the public markets is there’s lots of scrutiny. Everyone’s kinda gonna pick through your financials with a fine tuned comb and, like, maybe we don’t want that. And I think what he basically said was, like, grow up. Do you not want that scrutiny?

Do you want to be a child? The metaphor he raised or or that he brought up was, imagine a college athlete. A college athlete says, you know what? I don’t think I really wanna go to the pros. People are gonna really just look at my statistics and gonna critique me a lot, and I’m gonna be on national television. I just wanna stick to college. And then he he kinda, like, drew this parallel between this fear of, like, the scrutiny and kind of, like, the microscope. Like, that’s actually a good thing.

Right? Like, that will force companies to get fit. That will force companies to talk about their path to profitability. It will force companies to think about why are we an enduring business over the next ten years. And while it may seem scary, it’s actually, like, a good forcing function on let’s get fit. Let’s build the muscle that will help us sustain and endure for the next, call it, ten plus years.

Look. I mean, I think in general, if you look at the venture capital market, like, it’s expanded massively over the last ten years. And I saw some tweet from Go Cool the other day who brought up, like, Bessemer’s memo on Mind Body, and it was kinda crazy to go back and look. Right? This was 2010, and they were doing a deal at 10,000,000 of ARR at ’42 pre. And you’re thinking that wasn’t that long ago. Right? Like, 10,000,000 of ARR at ’42 pre? Like, the reality is the venture markets have expanded so dramatically.

Again, another Doug Leone quote. Right? You know, he called venture. It’s moved from a high margin cottage industry, right, to a low margin mainstream industry. And there are lots of implications of that. I think one implication is you have these really big funds, right, who their mandate is to put money into private companies. Right? When you have big pools of capital chasing the scarce resource, right, which is the high quality founders and and high quality businesses, it can create this dynamic of keeping companies private for longer.

Right? You had companies like Twilio and Mongo and Shopify. The list goes on of, like, really not that old companies that went public at a billion, $2,000,000,000 valuations. Right? And they saw their company’s value appreciate significantly in the public markets. Right? And the challenge of staying public for longer is companies generally follow this growth curve, right, of growth mode to maturity mode. And the challenge is if you wait too long and you go public, once you’re in kind of like degrowth mode, the story and the multiple that you will get will be drastically different.

And if you’re not profitable and your growth is really starting to slow, there’s just not gonna be much appetite in the public markets, and you just have to be willing to accept, like, a two times, three times revenue multiple. Right? And that’s a very different outcome than going public earlier in that journey. And so I’d encourage lots of companies just to think more critically about, like, should we go public sooner? Just let’s accept that down round. Right? In the same way layoffs were this taboo thing from 2022.

No one wanted to do them, and then everyone started doing them, and they were okay. I think kind of down rounds or down round IPOs will be the same thing. There’ll be a taboo on them, but they’ll be normal.

I would answer in a couple of different ways. I shouldn’t be in the business if I didn’t think of creative destruction and that the world gets reinvented every ten, fifteen, twenty years. Right? So I fundamentally believe that with the new platform shift happening with kind of AI and by way, I’m not an AI investor nor do I chase AI things. I just believe AI is just part of what we do every day. It’s gonna be infused in those software where it makes sense, where people will pay for it, where it’s economically important.

But I do think we’re gonna enter a new cycle where things have been around fifteen years, and they’re gonna get reinvented. So as an early stage events investor, I need to believe that, and that’s always going to be the case. Secondly, yeah, Jason’s right on and things have slowed down. They’re not growing a 100% year over year. Yeah. Enterprises aren’t spending willy nilly. In fact, enterprises bought way ahead of the curve. I think they’re continuing to grow up into the right. And the other part would be probably 25 of all this revenue from all these tech companies was selling to other start ups.

That shit vaporized, dude. So if you look at the growth from that, that automatically kind of dragged everything down. But I do think that the customers that are signing on board last year are buying at the right numbers. From there, you know, this new cohort of customers, I think that retention is gonna get back to a place where it’s more like one ten. So that could be one thirty, one forty, but maybe healthy numbers like one ten, one fifteen. We’re gonna work through it all, but I think that we’re gonna actually come back to the point where retention will get back up, and and we have to believe that people are gonna create new things all the time, which I do.

that,

I got one for you too, Harry. I got I got a crazy one. Like, the other thing is there’s these new markets that you just don’t even know what’s gonna happen, particularly in cyber. Like, even, like, protect AI and the AI security space. We funded that thing in early twenty twenty two, and the thesis was three years from now, maybe there’ll be a seminal event in security and AI that’s gonna actually make people rush run for the hills. We didn’t realize GPT would come around, you know, at the end of the year, and all of a sudden, AI security now is a big deal.

There’s always these new things that we never have thought of because we’re not smarter to think about it. It’s the crazy founders that do. You know, we all need to keep our eyes open for for those types of things too.

Let’s do it.

This shit is really fucking hard, and it takes a long time, so you gotta be patient. And the things that always seem like they’re the best ones in your portfolio may eventually be the worst and the vice versa. So you gotta figure that out. You gotta ride through the times. And I think when things are going really, really well, that’s when you challenge the foundries even more. And when things are shitty, that’s where you kinda pick them off of the ground and maybe kinda cheer them on a little bit.

So I call that my three c h’s, cheer, challenge, and chill, and you kinda do the opposite. And, you know, sometimes the worst ones can come out and and create some value for you. Jamin, what

Cool is the is the enemy of reality. Right? There are a lot of products in venture companies that seem cool, but, like, at the end of the day, you need to solve a real tangible problem for someone. Someone on the other end of the buying decision is putting in a purchase order who is making a case to their boss that this is the problem that I’m solving with this product, and here is exactly why I’m buying it. Right? And so you have a lot of cool products that sound good, but at the end of the day, it’s the boring stuff that really actually moves the needle and and builds the big businesses.

that boring became sexy for a few years and Yeah. And that kinda destroyed evaluations for a while.

Yeah. I’m looking at Microsoft, you know, even though that’s still priced pretty high. I just think that because of their lead on everything AI, that they’re taking market share on the cloud side. So I think that that’s gonna drive a lot of their business, and I’m hoping that by the back half of the year, you know, you start seeing some of the revenue numbers reflect in that. That’d be my long. My short would probably be I mean, just what everyone’s looking at now is just Apple.

You know, you’ve got an iPhone growth issue. I what the one thing that gets me excited about Apple is the idea of, machine learning and AI on the edge device, whether it’s in the laptops now or even in the phone. So these models get smaller and get pushed out onto these devices. I think there’s gonna be some interesting stuff built that has privacy, compliancy built in, speed built into that, but I don’t see where that results in revenue in in in this year from that perspective.

Look. I I think a broader theme that I truly believe in is you don’t have an AI strategy without a data strategy. Right? And a lot of the the AI value prop today really comes down to do you have your data house in order? And so I think we’re going to see a lot of wait. Maybe without shilling portfolio companies. Yeah. I think we’re gonna see You should. You should. You wouldn’t be a VC if you don’t shill. Go shill, please. For sure. I think you’re gonna see a lot of, like, data businesses and data platforms, like, really take off as folks realize, hey.

We have to get our data house in order before we can truly adopt a lot of this AI stuff. Yes. So maybe in in true VC fashion, right, Tabular is a business that is building a data lakehouse solution around Apache Iceberg, which the founders built inside of Netflix that I think is super exciting. Right? And and kind of this data lake house, right, you have Databricks, the behemoth, the big gorilla. I think that category is a really big and important one, and and I think Tabular is gonna play a a pretty big role in in the future of that.

I’ll just shill right at the back. Okay? So is he to his point, I think that there’s no AI in the enterprise without AI security. And I think that’s a completely new category now, but I do see a lot of pain, whether it be the idea of MLSecOps, which is kind of, understanding kind of how data scientists are building their models and kinda how secure the data is, how secure the models are, all the way to the idea of, we’ll call it ML BOMs, the bill of materials.

What goes into you know, because a SBOM would be software, but an MLBOM includes data and the model and the software. So I’ll show Protect AI, which I really love the founder. It’s his third company right now out there assigning some pretty interesting enterprise customers, and he’s got a really interesting product strategy and and product to boot. So I’m just gonna chill, and I think there’s gonna be a lot of other AI security companies coming down the pike as well. And I think the big boys are gonna start paying attention to that as the customers ask for it.

I would say maybe what’s like a misconception, I think you do have a lot of folks who view venture as something that they can kind of, like, pick vintages to sit in and out of. And I would say picking vintages from the LP side is is really hard, in my opinion. Right? Like, the right approach is pick a manager and and pick managers, and manager selection right now is more important than ever and invest across those small set of managers, like, vintages. And and kinda like, that’s the better way to diversify versus let me try and pick a vintage, you know, and manage around that.

I think that generally leads to kind of, like, missing some of the best vintages. Right? Market timing is very hard in any asset class. Yeah. That’s what I would say.

Sim, This is the time to put money to work. And so that could be counterintuitive. Maybe some LPs don’t want the capital calls, but the firms that are making capital calls in 2024 putting dollars to work, I think this is gonna be an amazing vintage because people are valuation adjusted. I think founders have their religion. I’m the one starting from now, and I think this is gonna be a fucking incredible vintage five years from now. I gotta leave some optimism here. Yeah. If you’re investing in our stages, I’m not optimistic.

I might as well not be in the business, but that’s kinda what I what I look at now. Let’s

A topic that we’ve been discussing today, like, companies are being built the right way. That is happening at an inflection point of a massive technology shift. When I think about, like, where do I wanna be investing, you know, I wanna be investing in a period that is the bottom half of the valuation reset with the first half of a technology shift. Right? It’s really hard to call, like, are we at the bottom? Are we 20% off the bottom?

Like, that’s too hard to do, but I think the setup for this year for next year is that we’re in the bottom half or maybe the bottom third of the valuation reset and in the first third of a massive technology shift that’s gonna create a ton of creative destruction. I am incredibly optimistic about this period in time, the startups that will be created, the opportunities to create value, and and kind of, like, the opportunity for this kind of vintage this year, next year to be a special one.

Call me stupid crazy, but I am bullish on Israeli founders building new startups. You know, we have over a dozen Israeli founding teams right now, and two of my fastest growing companies in fund five, vintage 2021, funded at inception to now. From zero to about 2,000,000 of ARR, we’re both Israeli infrastructure companies. And mind you, one of the teams that two of the founders called into reserve duty as they’re in a very special unit. And despite all that, they still grew faster than any other portfolio company.

The resiliency is off the fucking charts. And as people back away from Israel because they’re fearful of kinda what’s happening there, I’m still seeing amazing teams there, and I think there’ll be great opportunities to keep putting dollars to work in security and infrastructure deals in Israel.

I’m used to Harry’s negativity. I like seeing the negativity, Harry, because that’s good.

No. This is fun. Thanks for putting it together.