Ep. 346: Aileen Lee is a U.S. seed investor. A venture capital investor, she is the founder of Cowboy Ventures. Lee coined the often-used Silicon Valley term unicorn in a TechCrunch article “Welcome To The Unicorn Club: Learning from Billion-Dollar Startups.” In this episode of the SaaStr podcast, Aileen and SaaStr Founder Jason Lemkin take a deep dive on how Aileen finds deals, her tips for a winning pitch, and the state of VC in 2020.
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This episode is an excerpt from Aileen and Jason’s session at SaaStr Summit: The New New in Venture. You can see the full video here, and read the podcast transcript below.
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Below we’ve shared the transcript of Episode 346:
Jason Lemkin: Okay, so let’s talk about this slide for a minute. And you have a broad exposure. You have exposure to segments that are, I call COVID beneficiaries. You have exposure to segments that probably are heavily impacted, right?
How do I … How you get your arms around the fact that cloud stocks on the left are at an all time high and we almost, and California is one of the worst economies in the Western world? How do I … How are you thinking about this?
Aileen Lee: I mean, the multiples that folks are trading at right now on the left hand, I don’t totally understand it. I think it’ll be interesting to see, because also the numbers, we don’t have Q2 numbers yet. When Q2 numbers come out, for some folks, they may be softer because budgets were not really locked up for most of Q1.
And so, I mean, I think if you are Zoom, obviously, or maybe an infrastructure, you probably won’t see a lot of the budget freezes and the layoffs and your sponsor being laid off. But I think for a lot of vertical SaaS, they’ll see impacts when the Q2 numbers come out. And so that may change what this chart looks like, maybe in July or August.
Jason Lemkin: Yep. When you look at Main Street versus the cloud index, what are you excited about today? Are you more excited about eCommerce? I mean, what especially non-obvious things are you more excited about?
Aileen Lee: Yeah. I mean, I think in a bunch of categories like healthcare and distance learning and infrastructure, this recession, which super sucks for a lot of people, it is going to be an accelerator for tech, because businesses are going to rely on technology and are also going to adopt technology faster.
So, it’s like in healthcare, one of my friends who’s a doctor says she feels like she fell asleep in 2020 and woke up in 2030 in terms of …
Jason Lemkin: Yeah, I bet.
Aileen Lee: … the industry’s willingness to adopt technology. Because it’s been a fight and it needs to be adopting technology across the board. And so, but now they have to.
Jason Lemkin: Yes.
Aileen Lee: And so, I think for a lot of states and regulatory agencies and businesses that have been pushing back to enable remote work, they’re going to have to change a lot of stuff and that’s going to take … A lot of investment’s going to happen in software. It’s not going to be like …
If the question would be like, “Do you feel like we have too many unicorns?”, we are going to have more unicorns. There’s no question in my mind there’s going to be more in the US and more in China, and then an increasing number in Latin America and in India and other markets that are really huge because this is… We’re in a good sector, tech is only going to get more important and more valuable.
Jason Lemkin: What does it mean… So we’re in these weird times, the cloud shares are at an all time high, NASDAQ’s closed, this crazy recession we’re in, but you’re bullish about unicorns. Right?
Aileen Lee: Yeah.
Jason Lemkin: Unicorn generation, how does that inform your thinking in terms of types of investments? Pace, valuations, anything? Does it inform your… Does it change your thinking?
Aileen Lee: Yeah. No, I mean, I think … Look, I was an A and B investor for 12 years and did some growth too and I switched to seed. Partially, I think, for personal reasons. I think it’s a better fit for me and it’s more fun. I’m really passionate about seed investing. And there are lots of really good folks that we partner with at A and B and C and D, who they’re really good at that, and this is the one thing that we want to focus on. We think it’s also a great category for like, you are getting in at the riskiest time where the valuations are lower, but there’s way more upside. It’s also more collaborative, as you know.
I had lots of friends in seed who were co-investing with each other and helping each other build companies. Whereas, at A and B and C, you generally, you can be friends with everyone in VC, but you have to beat all of them to win the A or the B. And then you’re carrying the water with the founders for the next decade as a lead board member, and you don’t get a ton of help from other people. So, I love seed and I’m super excited about it.
Jason Lemkin: So I want to dig into that next, on the next point. But before we leave this slide, do you have any portfolio companies that have benefited from this time that you didn’t expect? Maybe even Zoom, we didn’t fully expect it would be this big. But are there any that folks could learn from they’re like, “Wow, I’m just kind of surprised that one is a COVID beneficiary.”
Aileen Lee: Not really a surprise. I guess probably one of the more notable companies that we work with is Guild Education. And I think because a lot of the folks that they work with, they basically help hourly workers who work for big companies like Disney and Walmart get high school diplomas or college educations or get vocational training. And I think because there’ve been a lot of layoffs in hourly workers, I think there could be a question about whether that was going to hurt a company like Guild. But it’s turned out that a lot of enterprises who have furloughed workers are suggesting that people who are furloughed use the time to actually get an education.
It’s also being used as an off-boarding benefit. So like, “We’re really sorry, we have to let you go. But we’re going to help you get on a career path, so you can get this benefit of trying to figure out where you’re going to get your next job.” So there’s been a bunch of things that actually have helped accelerate Guild that I think could have been a question. And obviously just the fact that they built this incredible infrastructure for remote learning is great.
Jason Lemkin: Yeah. It’s an interesting one because on the one hand, it’s remote learning, right?
Aileen Lee: Mm-hmm (affirmative).
Jason Lemkin: And very powerful. On the other hand, it’s a benefit, right?
Aileen Lee: Yeah.
Jason Lemkin: You know the company much better than I do. But it’s a benefit, that’s where the budget comes from. That’s why it’s done well. But it’s a benefit, and as soon as folks cut at traditional companies and cut people, you would think the benefits … We’ve seen many folks in the benefits space be exactly linearly impacted.
Aileen Lee: Totally.
Jason Lemkin: Linearly impacted with layoffs and it’s natural. Right? It’s like cutting back on rent. We’ll cut back on benefits.
Aileen Lee: Totally. Totally. So that was the one, it was like, “Uh-Oh.” But so far it’s going great.
Jason Lemkin: That is interesting. What’s your gut? What percent of startups you think are COVID beneficiaries? Have you looked at it? Do you have a sense? What do you think?
Aileen Lee: I think, unfortunately, it’s a pretty small, it’s a small percentage.
Jason Lemkin: Yeah. [crosstalk] percent are benefiting.
Aileen Lee: I’d say 10 to 15. I don’t think it’s …
Jason Lemkin: 10 to 15?
Aileen Lee: Yeah. What do you think?
Jason Lemkin: I made up a number just based on a very limited data set. I think it’s, in SaaS, in cloud, if you define it that way, I think it’s about 15 to 20%.
Aileen Lee: Yeah.
Jason Lemkin: And it’s more of the folks on the left than we would have thought, which maybe there’s some learning from that. We missed it. We knew Slack would benefit, but actually Atlassian’s benefited much more than Slack. Did we know bill.com would benefit as much as Zoom? I don’t know. If you didn’t analyze its business model, you would think that intuitively. Right?
Aileen Lee: Yeah.
Jason Lemkin: But I feel the question, and let’s maybe transition to that. Let’s assume it’s 10 or 15 or 15 or 20, it’s a big delta. But you’re not saying it’s single digits, right?
Aileen Lee: No.
Jason Lemkin: For the rest of the year, or at least for the next quarter or two, would you only invest in COVID beneficiaries or would you invest in folks in heavily impacted industries? Like how are you thinking about that?
Aileen Lee: It’s a spectrum. I don’t think I’m going to be going to try and find a lot of travel startups right now. But I do think … we’re investors in a company called Homebase that basically sells SaaS for small-medium size businesses to do hourly work management. Like scheduling shifts, paying folks, giving them cash advances, communicating with the manager. Obviously, the majority of the people who they were managing the shifts and the payments for who were working in February, they were not working in March or in April.
But when businesses reopen, I think they are going to rely on technology more than ever before. Some of the older businesses that were a little hesitant about technology, they may not reopen. And the people who start businesses in the next generation are going to be like, “I need a full stack of modern software to run my business, so it’s flexible and it’s nimble and I have good transparency and I can do it from anywhere.” And so they will adopt things like Homebase at a faster rate than businesses that have been around for 30 years. And so I think if you time it right, I mean, you can basically ride the wave of all these businesses reopening.
Jason Lemkin: For your existing portfolio and new investments, can you model that? I mean, you have to have, at least, have a position, right?
Aileen Lee: Yeah.
Jason Lemkin: Is it six months? 12 months? They just announced today, Disney World’s going to start to reopen.
Aileen Lee: Wow.
Jason Lemkin: When will Homebase get back-
Aileen Lee: When is it going to reopen? Is it going to be like six feet apart and every other? Like on the rollercoaster.
Jason Lemkin: July. Yeah. They’re going to adopt the Shanghai processes. Attendance will be half. You can’t hug a prince or a princess and you have to get reservations.
Aileen Lee: Is the price going to be double?
Jason Lemkin: Well, that’s a question for a lot of things down the road. If the price doesn’t double, I mean, that’s a restaurant question too, right?
Aileen Lee: Yeah.
Jason Lemkin: I mean, if prices double, it all works. And obviously Disney can carry a business for a little while. Those are some of the scarier questions for our economy. Is can we adapt to things? Can we adapt to Coachella when we’re 20 feet apart? I mean, I don’t know. I don’t know if Coachella at $4,000 a ticket works, does it?
Aileen Lee: No, but also it was funny. I was in San Mateo County. I think they had a rule that some camps can open, but they have to, you have to sign up for four weeks at a time because they don’t want kids in and out. But it’s like that really disadvantages people who cannot afford four weeks of camp.
Jason Lemkin: Oh yeah.
Aileen Lee: It’s not good. Yeah. There’s a lot of challenges.
Jason Lemkin: A lot of challenges. A lot. And I think a lot of, probably beyond the scope of what can we get into today, but a lot of these flattening things you might… and we can talk about it in deal flow. You might think some flattening helps less advantaged, but I don’t know. Do you think pitching over Zoom helps outsiders more? Do you think it helps the founder that didn’t go to Stanford and didn’t go to YC? Or is it maybe not help as much as you think pitching?
Aileen Lee: I am hopeful. I mean, I think there’s two things, there’s the pitching, but there’s also, where’s the company going to be based? That’s all up in the air now. So before, I mean, look, when I was at Kleiner, I spent a year spending a lot of time in New York, there was a lot of stuff going on in New York. And when I came back and I was like, “Hey, I found all these cool companies like Mongo and Warby and Stack Overflow.”
And some partners were like, “Why are you wasting your time? No big companies are ever going to be built outside the Bay Area. We clearly didn’t teach you well.” And same thing with HomeAway actually, it was the same thing. It’s like, “Why are you wasting your time?” And so things have changed a lot in the past 10 years, but I am hopeful that–I was just on the phone with one of the CEOs we work with today, who is in New York and they’re moving to Denver. I think over the summer, people are going to be moving all over the place and trying to figure out how to run remote or partially distributed or clustered companies. And I think that will advantage founders who are in different places and are not on the coast.
Jason Lemkin: I think it started like last week.
Aileen Lee: You think so.
Jason Lemkin: I think that folks that live in San Francisco, founders and executives that live a crummy lifestyle in San Francisco, in gross parts of the city that have sacrificed–that maybe even have families, that have sacrificed a lot, are looking around. Like several conversations I’ve had with looking around, like, “What is the point of being in San Francisco today? I cannot visit Salesforce. I can not visit Twilio. I cannot visit a customer. And I have a baby and a husband or a wife or significant other living in, not just a small apartment, but a gross part. I’ve traded off so much.” And I three people I know packed up the minivan and left.
Aileen Lee: Totally. I agree. Like we had another CEO that we worked with, they packed up their car and they rented an apartment, or a house, on a Lake in South Carolina. They had never been there before. They’d never been to the town and they just drove there and they lived there for the past month and a half. And he’s been so much more productive and so much happier. There’s a whole nother thing we won’t get into around mental health and all. Especially if you’re by yourself in a small apartment, it’s not happy making.
Jason Lemkin: Yep. And how do you think, like, let’s just, maybe this is a, not a good example, but when you invested in Guild, they were based in Denver, right?
Aileen Lee: No, they’re based in Palo Alto.
Jason Lemkin: Oh, I thought it was based in Denver.
Aileen Lee: They moved to Denver. It’s funny because Rachel came to us and said like, “Hey, I know we just had a meeting and we discussed, we need to hire a VP of engineering and a VP of product and a VP of marketing. But we also want to move the company in Denver.”
And we were like, “What? How are we going to find those people in Denver?”
And she was like, “Trust me. There are some really good companies there. And some tech like Facebook and Gusto are opening offices. It’s a great place to live. I think I can get people from the east coast and the West coast to move to Denver. Because if you want to have family or if you want to buy a house, you want to send your kids to public school. It’s a great place. And I want to build a company where people can have a family and have a good home life and have a great job.”
And I’m so glad that we were like, “Okay, do it.” Because it was a really smart move in probably three or four years ahead of her time.
Jason Lemkin: Yeah, it was. So she’s built a unicorn now. And let’s compare today. I mean, you had no choice, but did you have reservations? Did you try to talk her out of it?
Aileen Lee: Oh, definitely. I didn’t try to talk. But I was like, “Are you sure?” But I mean, I think it gets a lot of the stuff on a slide. Which is we are seed, I would say half the time that we invest, they haven’t built a product yet. There’s no technology, they need money to actually build software. And then half the time they’ve built like some MVP. We do about, we’re probably 75% enterprise, 25% consumer, we’re generalists. We usually invest between 500 K to one and a half million. We like to co-lead, or co-anchor seed rounds and we almost always co-invest with other folks, angels and institutional seed folks like yourself.
And so at Guild, they had basically had an idea for kind of reboot your career boot camps. And they came up with a three hour bootcamp and they posted it on Craigslist. And they rented strip mall, vacant space, and they were holding these free three-hour boot camps. And then they were texting the people afterwards asking for–And then they charged 40 bucks and then 80 bucks. But that’s basically what they had when we invested. And so it doesn’t have to be perfect at seed.
Jason Lemkin: And so I want to make sure we hit the bullets on this slide, but so today let’s fast forward today. So, four years ago when Rachel said, “We’re moving to Denver to build my management team.” And now that I understand kind of how raw the vision was in the beginning, I get it. Because it wasn’t technology heavy in the beginning, that’s for sure. So I get it. But today, how are you feeling about, not just New York or Denver, how are you feeling about Baton Rouge or Sioux Falls or Tampa? How does that strike you today for new deals? And what would you advise founders that are thinking about leaving the Bay area now?
Aileen Lee: Yeah. I mean, it’s a better time than ever to both, to start a company in a different part of the United States. People are going to have to be way more purposeful around culture building and about communication. Because it’s still been a rarity to build a really successful scaled company without having formative team members live and work in the same place and be next to each other. A lot of times we recommend for portfolio companies that are opening up second or third office, it’s like you have people all in the headquarters and then you send out people who really understand the culture and how to have a lot of internal credibility and they start the new offices.
In some cases, I’m really curious as like, founders may start companies they’ve never been in the same office when they start the company. When we hear pitches this fall, we’re probably going to hear people who have not seen each other. But SVT Robotics is a company that is based in Virginia, Virginia Beach, actually. And it’s kind of like MuleSoft for warehouse robotics for integrating. If you’ve got a third party robotic arm and you want to integrate it with your conveyor belt or your WMS, you’ll use SVT instead of writing custom code. The founders know warehouses and they know warehouse automation really well. And they’ve lived in Ohio and Pennsylvania and Virginia, and all the places where warehouses are. And we’re super psyched to be investors in that company. And we’d love to find more like them.
Jason Lemkin: Those are all really interesting examples. Today, if you met with a startup and you’re doing seed, so it’s early, but it’s the kind of company that clearly could benefit in a year or two from some Salesforce alums or Box alums or Twilio alums. They’re doing a classic playbook and they want to move to Arkansas or Ohio or Bismarck, is that a no in this flattened world, in this distributed world? Do you think you can get VPs to join a company, Bay Area style VPs, to join non-Bay area companies in 2020? Do you think that’ll change?
Aileen Lee: I think we can do it. It’s funny at Textio, another company that I work with, which is based in Seattle, we tried hard to make the whole team Seattle-based, and when we were doing our head of revenue search, we said like, “Maybe we should open it up and look at people who are not based in Seattle.” And we found a great person who’s based in the Bay area. I mean, at the time we had a deal where he was going to spend a week or two in Seattle, a month and then a week or two at home or on the road.
And so we’re fortunate that we had that time together before we wanted to go into shelter in place, but it works. And he’s a huge part of the team and they’re making it work. So I think we’re all learning, fortunately, or we have been learning over the past couple of years how to make kind of commuter style jobs work and distributed team work which is a good warmup for the next three years we’re about to live through.
Jason Lemkin: All right. Aileen, thank you for doing this. This was great and we’ll talk to you soon.
Aileen Lee: Thanks everybody.