20VC Roundtable: Is the VC Model Broken? The Biggest Disconnect Ever Between TVPI & DPI, Why Market Size is Dangerous, Why "Go Fast" is Terrible Advice, The Dangers of Raising Large Rounds at High Prices & Why Next Year Will See the Biggest Hiring Spree i
Sep 20, 2023
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Eric Paley, Mike Maples, and Jason Lemkin discuss the viability of the seed model for boutique seed funds, the importance of product-market fit and business model fit, the appropriateness of founders asking for money back, investing with a sense of responsibility, predicting a hiring spree in the cloud industry, experiences with exiting companies and taking liquidity, and their investment strategy and long-term capital.
Outliers in the startup world usually start at a low price because they are non-consensus and unique ideas.
Focusing solely on ownership is problematic and can hinder collaboration with other investors.
Being overpriced at the seed stage can be a bigger problem than most entrepreneurs realize, as it can make raising follow-on funding more difficult.
Venture capital is not about short-term gains but rather a long-term journey with portfolio companies.
Deep dives
Outliers start at a low price
Outliers in the startup world usually start at a low price because they are non-consensus and unique ideas.
Importance of not focusing on ownership
Focusing solely on ownership is problematic and can hinder collaboration with other investors.
The risk of overpricing at the seed stage
Being overpriced at the seed stage can be a bigger problem than most entrepreneurs realize, as it can make raising follow-on funding more difficult.
The significance of product market fit
Product market fit is crucial, and many companies fail because they lack a good business model or haven't identified a unique value proposition that customers are desperate for.
The Dangers of Overcapitalization and Misguided Valuations in Startups
Many startups today are raising massive amounts of capital, often with exorbitant valuations. However, this overcapitalization can lead to significant problems in the long run. Startups may struggle to realize the true value of the money they've raised, leading to a liability rather than an asset. Some founders may try to fake success, but ultimately fail to attract further funding. The danger lies in the mismatch between the extraordinary valuations and the actual revenue or potential of these companies. Recapping a billion-dollar valuation for a three-million-dollar revenue company is not an attractive prospect for many investors. As a result, some founders may choose to 'quietly quit' instead of trying to sustain an unsustainable business. Returning the money and maintaining integrity can be a wise move, but it must come from the founder's own decision. It is crucial to understand the dynamics between founders and investors in navigating the challenges posed by overcapitalization.
The Importance of a Long-Term View in Venture Capital
Venture capital is not about short-term gains but rather a long-term journey with portfolio companies. It is the task of venture capitalists to spot and nurture companies that possess strong product-market fit. The focus should be on building intrinsic value rather than getting caught up in short-term fluctuations and valuation obsession. The market will invariably go through ups and downs, but targeting companies with long-term potential and supporting them through their journey is key. While macroeconomic factors may impact the market, successful venture capital investing often relies on spotting unique opportunities and navigating the specific circumstances of each company. This requires a shift away from thinking fast to thinking slow and taking a builder's perspective over transacting for short-term gains.
Navigating IPOs, Secondary Sales, and Market Multiples
The discussion delved into the dynamics of IPOs and the complex decision-making around timing and pricing. Going public is not always the ultimate goal, and there can be disadvantages to premature or ill-prepared IPOs. The obsession with the first-day price and the pressure to meet market expectations can overshadow the fundamental value of a company. The focus should be on building long-term value, irrespective of short-term market fluctuations. Market multiple fluctuations can create challenges for venture capital firms, with potential downstream effects on valuations for B2B companies. However, it is important to recognize that market values are not fixed numbers and can span a wide range. It is crucial to maintain a broader perspective, considering the probability distribution and the intrinsic value of each company.
Eric Paley is the Managing Partner at Founder Collective, one of the world’s most successful seed funds with investments in the likes of Uber, The Trade Desk, Coupang and Airtable.
Mike Maples is one of the OGs of seed investing. As the Co-Founder of Floodgate, he has backed the likes of Twitch, Okta, Lyft, Twitter and more.
Jason Lemkin is the Founder @ SaaStr one of the best-performing early-stage venture funds with a portfolio including Algolia, Pipedrive, Salesloft, TalkDesk, and RevenueCat to name a few.
In Today's Episode on Is the Venture Model Broken? :
Is the classic seed model dead? Can seed funds play in a world of $25M valuations?
Why is having a firm grasp of the present the best thing an early-stage investor can have?
Why does Mike Maples believe no company with true product-market-fit has ever failed?
Why does Eric Paley believe "go faster" is the worst startup advice?
Why does Mike Maples believe there is a direct relationship between price and risk?
Why does Mike Maples believe that outliers by their very nature are lower priced?
Why does Eric Paley not focus on ownership? Why can it be dangerous?
What are the biggest risks for founders raising at valuations that are too high?
Why does Eric Paley believe we will have the biggest chasm between TVPI and DPI in the prior vintage of venture capital returns?
Why does Eric believe the majority of SPACs were BS and great companies can always go public?
Why does Jason believe that if multiples do not reflate, the venture model is broken?
Why does Jason believe we will see the biggest hiring spree in tech next year?
How has illiquidity allowed Eric Paley to make some of the best investment decisions?
What is Mike Maples biggest lesson from selling Twitter stock early at $1BN?
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