20VC: Why Seed is Systemically Broken | Why Pricing is Worse Than Ever and There is More Funding Than Ever | Benchmarks for Churn, Retention and Growth Rates - Good vs Great | Why Last Vintage for Private Equity Will Suck with Jason Lemkin
May 27, 2024
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In this engaging discussion, Jason Lemkin, a pioneering SaaS investor and founder of the SaaStr community, shares insights from his impressive portfolio of unicorns. He delves into why the traditional seed VC model is broken and how companies are now inundated with cash that often fails to ensure well-grounded growth. Additionally, Jason emphasizes the importance of strong founder dynamics, particularly the winning combination of a CEO with sales prowess and a technical CTO. He also highlights critical metrics for startup success, such as churn and retention rates, offering an expert's perspective on what truly drives sustainable growth.
Founder partnership of CEO salesperson and CTO is crucial for success in startups.
Venture capital industry faces challenges due to broken seed funding and problematic pricing.
Achieving triple-digit growth rates and IPO readiness require strategic planning and aggressive market expansion.
Maintaining a healthy burn ratio is essential for long-term viability in software as a service (SaaS) companies.
Deep dives
Seed Investments in Systemically Broken Today
Seed investments are facing challenges with increasing capital and fewer scalable opportunities for triple-digit growth rates. The best investments typically reach 1 to 10 million within five quarters or less. Achieving IPO readiness often requires tripling revenue multiples before entering the public market. Expansion beyond a 10% market share is crucial for sustained growth.
Analyzing Best and Worst Deals with Investor Jason Lemkin
The podcast introduces a new segment called 'The Review' where notable investors discuss their top three best and worst deals. Jason Lemkin, an OG SaaS investor, shares insights on unicorn investments like Pipe Drive, Algolia, and Salesloft. Evaluating financials and key lessons learned from successful and challenging deals form the core of this detailed investor review.
Importance of Founder Commitment in VC Investments
Founder commitment plays a critical role in venture capital success. Having a dedicated founder pair, intensely committed to success, with a balance of strong product development and sales capabilities, is a key factor for thriving startups. The need for relentless dedication and a focused, binary team structure drives long-term success.
Diligence and Investment Decision-Making in VC
The diligence process in venture capital investment involves early financial verification to prevent discrepancies and shenanigans. Checking the financial integrity from the onset is crucial for ensuring investment stability. Conducting customer references strategically and aiming for a structured approach in due diligence helps in making informed investment decisions.
Navigating Challenges in Competitive Markets and Growth Models
Balancing investment strategies in competitive markets requires a nuanced approach to avoid missing out on innovative startup opportunities. Understanding the dynamics of market growth and customer acquisition entails evaluating churn rates and growth predictability. Maintaining a focus on triple-digit NRR for enterprise growth and addressing SMB churn challenges while predicting and managing growth fluctuations is essential for sustainable investment strategies.
Managing Churn Rates and Growth Challenges in VC Investments
Churn rate management is crucial in venture capital investments, especially when assessing SMBs versus enterprises. Maintaining a triple-digit NRR focus for enterprise solutions while strategizing to mitigate high churn rates in SMBs is key. Leveraging growth predictability models, focused due diligence, and founder commitment can enhance investment decision-making and long-term sustainability in VC investments.
Importance of Efficient Burn Ratio in SaaS Companies
Having an efficient burn ratio in software as a service (SaaS) companies is crucial for sustainable growth. The burn ratio, popularized by David Sachs, indicates the relationship between expenses and revenue. A burn ratio of one or lower is considered efficient, especially when accompanied by strong revenue and high net revenue retention (NRR). However, in SMB-focused SaaS models where NRR might be lower and margins impacted by factors like hardware costs, a lower burn ratio is necessary. The key takeaway is that maintaining a healthy burn ratio is essential for the long-term viability of SaaS companies.
Challenges of Investor Mindset in Fast-Growing Funds
In fast-growing funds that experience outlier events like significant returns from investments, challenges arise in maintaining investor interest and momentum. Founders of venture capital funds may face dilemmas when dealing with substantial gains from high-profile exits like Datadog or Viva. While initial success can lead to significant wealth, subsequent investments may not yield similar returns, impacting partner dynamics and investment strategies. Balancing expectations, managing ownership stakes, and navigating the transition from exceptional returns to sustained growth become critical factors for continued success in the competitive venture capital landscape.
Jason Lemkin is one of the OG SaaS investors with all of his first five investments turning into unicorns with Pipedrive, Algolia, Talkdesk, Salesloft and RevenueCat all in his portfolio. SaaStr is the largest global community in SaaS and he has taught a generation the fundamentals of SaaS on saastr.com.
In Today's Episode with Jason Lemkin We Discuss:
1. Growth Rates and Churn Rates: Average/Good/Great:
What is a growth rate that would excite Jason in a SaaS company? What is average?
What levels of churn would worry Jason to see? What would excite him to see?
What does Jason never tolerate when it comes to either growth rate or retention?
2. What Founder Combination Always Wins:
Why does Jason believe you cannot lose money on a CEO salesperson and a technical CTO founding partnership?
Why does Jason always meet the CTO for a second meeting in the diligence process? What questions does he ask? What do the best CTOs do or say?
Why does Jason always want to sell his shares when the founders want to sell?
Why does Jason believe that a company is never the same when the founders leave?
3. WTF is Happening in the World of VC:
Why does Jason believe that pricing is worse than it has ever been in venture?
Why does Jason believe that traditional seed VC is systemically broken?
Why are companies getting stuffed with more cash than ever before?
What does Jason know now about dilution that he wishes he had known when he started?
Why does Jason believe that you should always recycle everything?
4. WTF is Happening in PE and Later Stage Markets:
What happens to all the overpriced acquisitions like Zendesk and Salesloft where private equity way overpaid for them, they have no growth and no product innovation?
What happens to the generation of public companies like Box, Dropbox and Twilio, all with low growth and little product innovation in the single-digit market caps?
Why does Jason believe that Klaviyo is the most undervalued public company today?
What does Jason believe will happen to Anaplan with Pigment eating their lunch?
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