20VC: The Memo: The State of the VC Market: Why Seed Funds Can't Invest in "Hot Startups" Anymore, Why Series A & B is Terrible, Why the IPO Market Will Explode in 2024 & Why VC DD is BS & Every VC Has More Fraud in their Portfolio with Jason Lemkin
Seed investors are actively participating in hot startups, but founders need to understand the changing dynamics and be realistic about fundraising expectations.
The Series A and B market is facing challenges due to a gap between investor expectations and founder aspirations, emphasizing the need for a more realistic and disciplined approach to secure funding at these stages.
Founders should prioritize building strong relationships with investors and recognize the benefits they bring, as venture capital is not just a game but a valuable partnership for ensuring startup success.
Deep dives
Seed Investing Still Active Despite Market Slowdown
Despite the current slowdown in the market, seed investors are still actively participating in hot startup opportunities. However, founders need to understand the changing dynamics of seed investment and realize that raising funds at later stages may not be as easy as they think. The market has become more rational, with seed companies needing to prove themselves before securing further investment. Founders should be prepared to offer transparent and realistic valuations and consider waiting to raise funds until they have achieved significant traction and a solid foundation.
Series A and B Market Challenges
The series A and B market currently faces significant challenges due to a disconnect between what investors want and what founders expect. While there is no shortage of capital, finding the right fit for both parties can be a struggle. Series A and B investors are seeking a return to rationality, while many founders still believe they can secure a hot A round in a short timeframe. It is crucial for founders to realize the need for a more realistic and disciplined approach in order to secure funding at these stages.
Founders' Attitudes Towards Venture Capital
There seems to be a lack of respect towards venture capital among founders. Many founders view venture capital as simply a game or a sport, disregarding the importance of ensuring returns for their investors. This might stem from a belief that there is an abundance of seed capital available, leading to a nonchalant attitude towards fundraising. However, it is crucial for founders to understand the significance of building strong relationships with investors and the potential benefits they can bring to their startups.
Lessons from Experienced and Serial Entrepreneurs
Investing in experienced and serial entrepreneurs can be a valuable strategy due to the knowledge and insights they bring to the table. While investing in first-time founders can be risky, the right support and guidance can help mitigate some of the common mistakes they may make. By leveraging their expertise and network, investors can help accelerate the growth and success of these entrepreneurs, setting them up for a higher chance of achieving positive outcomes.
VC Due Diligence: Confirmatory vs. Thorough
Venture capitalists tend to prioritize confirmatory due diligence, where they already have a positive bias towards the deal and focus on confirming their assumptions. This approach leads to a lack of thorough investigation, resulting in fraudulent companies making their way into VC portfolios. VCs often ignore red flags and objections to close deals quickly and to stay competitive in a fast-paced market. The prevalence of fraud in VC portfolios is a concern, with founders often misrepresenting financials, revenue, and other key metrics. VCs tend to downplay or ignore these issues, which ultimately impacts their Net Promoter Scores (NPS) and can have severe consequences.
The Challenges and Opportunities in Growth Stage Investing
In the growth stage of the venture capital industry, there is a ceiling on valuations, with a typical multiple of 15 times the annual recurring revenue (ARR). Startups that reach the 30-60 million ARR range and demonstrate efficiency may attract multiple term sheets at these valuations. However, there is a scarcity of candidates for investment at this stage due to inflated prices and the preference of growth stage companies to delay funding until higher valuations. Consequently, growth investors focus on performing secondaries to clean up cap tables and buy out early investors. This strategy of clearing the cap table alleviates the pressure on growth stage companies to accept term sheets at lower valuations. Overall, the IPO market is expected to pick up momentum in the back half of 2024, generating liquidity events for both investors and founders.
Jason Lemkin is the Founder @ SaaStr one of the best-performing early-stage venture funds focused on SaaS. In the past, Jason has led investments in Algolia, Pipedrive, Salesloft, TalkDesk, and RevenueCat to name a few. Prior to SaaStr, Jason was an entrepreneur, selling EchoSign to Adobe for $100M where it is now a $250M ARR product.
In Today's Episode with Jason Lemkin We Discuss:
1. WTF is Happening At Seed Right Now:
Why does Jason believe seed is more active than ever?
Is the pricing of seed rounds impacted since the downturn?
Why does Jason believe it is not only not the end of party rounds but just the beginning of them?
Why does Jason believe you cannot fail if you have $1M in ARR and an amazing founder?
Why does Jason believe that seed investors cannot participate in "hot seed rounds" anymore?
2. Is Series A a Dead Zone:
How does Jason analyze the Series A and B environment today?
What has changed in what investors expect and want to see in potential Series A and B investments?
What happens to the many companies who raised pre-emptive Series As and have 10 years of runway but no product-market fit?
Why does Jason believe founders should offer to give the money back when it is not working?
What happens to the Series A and B market in the next 18 months? When does it come back?
3. Growth: People are Too Negative!
Why does Jason believe that growth is more active than many are giving credit for?
What are the ARR benchmarks required to get a good growth round term sheet today?
Why does Jason believe that VC DD is a load of BS?
Why does Jason believe that every VC has fraud in their portfolio? Will they come out?
4. Ring That Bell: IPOs and M&A:
Why does Jason believe 2024 will be an amazing year for IPOs?
Why does much of the IPO market rely on Stripe and Databricks?
What is needed for an amazing 2024 IPO market?
How does Jason evaluate the M&A market in 2024? Will regulation get in the way?
5. Jason Lemkin: AMA:
Why does Jason Lemkin believe this generation of workers will never work hard again?
What is the only way for seed funds to make money investing in serial entrepreneurs?
What does Jason know now that he wishes he had known when he started investing?
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