Ep. 353: Keith Rabois (Paypal, Linkedin, Square) and SaaStr Founder Jason Lemkin talk about the landscape of SaaS & Cloud fundraising and valuation in 2020.

This episode is sponsored by Lightmatter.



SaaStr’s Founder’s Favorites Series features one of SaaStr’s best of the best sessions that you might have missed.

This episode is an excerpt from Keith 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.


Ep. 354: Whether you’ve just raised your first round or are in hypergrowth mode, here are the 10 things SaaStr CEO and Founder Jason Lemkin wishes his board and investors had told him.

Jason also provides the list here.


If you would like to find out more about the show and the guests presented, you can follow us on Twitter here:

Jason Lemkin
Keith Rabois

Below we’ve shared the transcript of Episode 353:

Jason Lemkin: Let’s step back because I know this is something that everyone’s thinking about all of the world, everyone on Twitter, tell me what you’re thinking about–how do I get my arms around this slide, right? On the left, we go into February and this is the best of times, isn’t it? 10, 11 years… I mean, it’s better than we ever thought. Right?

Jason Lemkin: There was this joke on Twitter the other day, someone who was pointing out how on your LinkedIn you said PayPal, it exited at a billion and now it’s worth 40 billion or 50 billion. So we figured out a long run, but even before you update your LinkedIn and then bam. Look at this, the BVP Cloud Index, we plummeted in March and then as we were talking about before, if you just put all your money just into Square on March 20th, you would have doubled your money, right? Let alone the Datadogs and the Shopifys and the Zooms. And yet, as you’ve talked about all, look at what’s happening in California. I mean, it’s devastating. As an investor and as someone looking forward, how do we weigh the two sides of this, the best and the worst of times?

Keith Rabois: There’s a couple of potential theoretical answers that would reconcile these two worlds. One is maybe stock markets are long term investors and all the critiques that public market investors are short term thinkers are just false and you can make a strong empirical argument right now that all of the major indices in the world are basically taking a long term perspective on the value of these companies, looking at the effectively discount cash flow projections and saying, “Hey, there’s this virus blip that’ll be between one and four quarters long, but nothing about a 20 year horizon has gotten worse and if anything, maybe things are better over 20 years.” So all the people who were whining, jumping up and down about the evils of short-termism and public markets, which I never really believed in anyway, maybe you’re just factually wrong. That’s one thesis.

Keith Rabois: Second way to go is typically, when you do your discounted cashflow for those of you who went to business school or something, you’re basic applying it, the key variables, actually your discount rate and with the effective interest rates being so low, your discount rate is basically negligible. Yeah, I know what discount rate you apply. In some ways, if you just held everything cost in and change your discount rate and reduce it by a meaningful amount, you’re going to get exactly the chart on your left. That actually would work just empirically also. I don’t think it’s that hard to reconcile these things. What’s a little harder to reconcile is what’s going on in Venture. We’ll talk about that separately, which is, I actually do think that most private market investors are somewhere between spooked and reorienting their approach and valuations. And that’s a little bit disconnected from the public markets at the moment. At some point, those things need to be in harmony, at least in partial harmony.

Jason Lemkin: So let’s come back to that in a second, but just to understand these two. Just to unpack a little bit what you’re saying. At least many SMBs are incredibly impacted, right?

Keith Rabois: Yeah.

Jason Lemkin: I mean, the levels of small businesses shut down. Many of which the Shopifys and the Squares would attempt to power. Some of them are doing better, don’t get me wrong. But the level of businesses in the Tenderloin, the level of businesses is a nap on. I mean, it’s going to be devastating. It’ll be years but many will never reopen. Does it not matter for the chart on the left? Does the unemployment… I mean, just getting away from the human impact, does it not impact at the end? Does it not all bubble up to even the best cloud stocks?

Keith Rabois: It’s unclear which stocks it bubbles up to. I mean, many companies are not really serving the target market of the SMBs that are most affected, think like traditional retail, traditional coffee shops, comfort food, gyms, fitness, et cetera. There are some companies that are technology companies that have to do work with them and do target them but that’s not the meat and potatoes of most companies. The Squares absolutely, Yelp to some extent absolutely. But that’s more the exception than the rull of the go to market for many companies. So you could still reconcile those if you had to. Then typically, in a recession and depression, whether we’re in a depression or not, open question, but the consumer demand falls apart pretty quickly. And because the driver or the impetus for this economic turmoil wasn’t really lack of consumer confidence or lack of consumer resources, it’s not clear that consumers don’t have the money to spend.

Keith Rabois: In so far as you’re talking about consumer or pseudo consumer stocks, people have a lot of disposable income at the moment, partially because they’re not spending it on things they normally would. Typically, a normal American goes out to eat a certain number of times a week. That’s expensive. They may take a certain number of Ubers, that’s expensive. They may go see a movie or two or show or play. They’re not doing any of those things. They’re actually effectively saving money. They have the ability to spend it in other places, whether they spend it now or save it and then spend it once the economy opens again. I think that that will help certainly prop up consumer based stocks. Then on the other hand or on top of that, the government’s obviously subsidizing a lot of people who are suffering and so they don’t feel-

Jason Lemkin: That’s for sure.

Keith Rabois: … The short, acute pain. They’re not changing their consumption patterns as dramatically as if they were… I was watching a movie the other night about The Great Depression, that was a true 25, 30% unemployment or 20, 25% unemployment, where there was no consumer spending. And so obviously the people that need consumers to spend money for their revenue and then their contribution margin just had no shot of selling things. Look at Model T sales or something. Right now if you look on the other side, an area I know a fair amount about, look at US real estate. Somehow this defies logic, but is true. Last month, housing sales in the US are actually ahead of last year, like literally ahead. That makes no sense in many ways. It’s like 16 depths ahead of last year.

Keith Rabois: There is in another tale two cities is most of the people that were most affected by the March and April shutdowns were not the people that buy and sell houses. They’re people who typically are 1099 workers with lower FICO scores or lower income. And so it didn’t affect the US real estate market, except for like two to three weeks where everything was shut down and just couldn’t transact. But right now, I mean, Redfin has published several studies publicly about how they’re ahead of last year. Zillow, I saw this morning is trading at probably at 52-week high. People are buying and selling houses. That suggests that there is this weird combination of something’s thriving and something’s failing. I think the music industry, for example, at the extreme other end is catastrophically affected. The idea that people are going to go see live shows in dense environments with poor sanitation or they’re going to… I just think that that whole industry doesn’t know what to do in itself at the moment and it’s going to take years to sort that out.

Jason Lemkin: Since you’re maybe spending more time looking at some of the consumer data than many of us are, it sounds like there is some hints of optimism in what you’re saying and that maybe you think… And we won’t hold you to this if in July you change your mind. We’re all learning. But it sounds like you feel like there’ll be a decent V. The $10 trillion being deployed to prop up the economy and pent up consumer demand may create a weird V, but it may create a V that’s reflective of the chart on the left for consumers.

Keith Rabois: No, I think it’s going to be more inconsistent. I think by segment. There’ll be some Vs and then there’ll be some complete flat-lining. I think it’s more overall more like 2000 to 2003 in Silicon Valley, but there’ll be some industries and some verticals that either aren’t affected as much or snap back very quickly. And then there’s going to be others that take years. There’s a stat I saw after 9/11. Just before 9/11 occurred, we’d hit a USP domestic travel record and it took three years until May 2004 to get back to the level. I think many industries will be like that, where it takes two or three years to get back to the same level. I think some businesses never get back to the same level.

Keith Rabois: I think international travel is almost permanently affected. Permanently, meaning measured in three to 10 year doses, aware of the idea that you can just travel almost anywhere in the globe on a whim is not going to happen. Countries are going to take their borders very seriously. There’s going to be different rules, and different processes, and different tasks and different paperwork you need to travel. Every time you add friction of getting paperwork, tasks, et cetera, less people are going to travel. The idea of a weekend trip from New York, people live in New York, a weekend trip to London probably that’s not going to happen for a very long time. Those industries and the associated industries, hospitality, et cetera, I think are in for a very long non V-shaped recovery. Whereas some industries I can see snapping back, maybe long tail retail, definitely. I already see this.

Keith Rabois: I’m a multiple time investor in a company called Faire that basically provides data and services to SMBs all across the US and gives them the tools to compete with Amazon. The company was doing phenomenally well and our customers were doing phenomenally well before March hit. We clearly saw the impact the first three weeks. It’s dramatic. Nobody can go shop in Main Street America. But in the last three to four weeks, there’s been a sustained week to week improvement. I suspect-

Jason Lemkin: In store. [crosstalk 00:11:49]

Keith Rabois: … Well, there’s some substitution. That’s a fair caveat. Some of these businesses, maybe even many of these businesses, have started investing more and more in selling online to their preexisting in store customers. They’ve been actually quite clever and scrappy and figured out how to offset the decline of revenue. But then now the fact is now in May, likely to be more like a 10 to 20% net. Well, actually that’s even wrong. The company will grow more than 2X year to year in that despite all the lockdowns. There is definitely a sustained improvement across the country. Inconsistent, they serve the virtue of having 70,000 retailers or something like that is you actually literally have retailers everywhere. And so yes, in San Francisco, they’re probably not selling that much and in LA, probably not selling that much, but somewhere in Nebraska, they’re probably back to normal.

Jason Lemkin: Yeah. The pieces that recover at which pace is interesting. I wrote–I looked a little while ago and I wrote an early SaaStr post in 2013. After I sold EchoSign Adobe, I went back and got out. I rented a small office in downtown Palo Alto, and it was middle of 2013 when the last boards came down on a retail store. The West Elm store, I don’t know if you know where it is. It’s near Wahlburgers.

Keith Rabois: Yes, of course.

Jason Lemkin: It was boarded up until 2013. That sounds crazy thinking about it, doesn’t it?

Keith Rabois: Yeah.

Jason Lemkin: 2013 had been boarded up.

Keith Rabois: The lag is very real. Then also, there’s industries where it’s just hard to fathom them how they deal, from an economic standpoint, with either consumer or government mandated density caps. Like, think restaurants, hard to imagine how the economics of those businesses work with half the tables.

Jason Lemkin: Let me just ask you on this one. I want to hit the next slide. Pick your date in February, whatever ,it doesn’t really matter, where were we overall in Venture one to 10? Say on February 15th or February 1st, where were we on one to 10?

Keith Rabois: I think we were already down to a six or seven.

Jason Lemkin: Oh, really?

Keith Rabois: Yeah, I think some of the corrections in valuation, enthusiasm, tolerance for high burn rates and things of that sort, had already been adjusting or were adjusted for the last six to nine months. Somewhat, I would tie it back if you had to put a kind of hidden timeline right around that we worked the debacle is when I think there’s a very clear retrenchment, repricing, re-analysis of what’s the right criteria for a growth round. For example Founders Fund, I don’t think we changed our criteria at all, but I felt like maybe we were on the 20th percentile in terms of conservatism on some of these metrics. I felt like everybody moved to agree with our metrics and goals and objectives very quickly, where maybe there’d be a 10% of people who had still fund stuff that we thought it was a miserable business from an empirical standpoint. It really did move from 80% fund stuff that we didn’t like to only 10% of people would fund stuff we didn’t like. [crosstalk 00:15:11].

Jason Lemkin: We may look back at the WeWork IPO as the moment when things changed. Right? And when that was whenever one, we didn’t see it all, but that might’ve been a moment.

Keith Rabois: I think that was when it was clear to people. It started to change before that, truthfully, at least in my view from my vantage point. But I think that was when everybody had the proverbial partner meeting discussions about what are we funding, why are we funding, what price are we funding. It was a crystallizing moment, even if some of that stuff already had some momentum behind it.

Jason Lemkin: If we were a six and a seven there, and that’s good, from a very narrow SaaS perspective, I would have rated it at 11 but I don’t disagree with you [inaudible 00:15:54].

Keith Rabois: Sure.

Jason Lemkin: Where are we today from your perspective if different from Founders Fund, if that was a six or seven, not March, not April, but wherever the heck we are today, May 27th?

Keith Rabois: Maybe like a three.

Jason Lemkin: You think it’s a three?

Keith Rabois: Yeah. I think there’s deals being announced. I mean, including IAA and now four investments over the last month, let’s say. But almost all of those have significant momentum, at least maybe a handshake, possibly a term sheet, maybe even signed documents before March 16th. Then it takes a while to get through the process of negotiation, real documents, wiring money, [crosstalk 00:16:38]. Yeah. All that stuff at large. I think that the reality is very few new deals are getting done, with very few exceptions. I think there are some growth rounds that are getting done because you can look at the spreadsheets and these are pretty impressive businesses. There’s a handful of businesses that just look amazing on paper. They look amazing on Excel or paper or whatever, Excel spreadsheets or something.

Keith Rabois: Those deals are possible to do, especially with public market comparables being both high and no longer quite as volatile. I mean, there’s still some volatility. You could just even look at today, there’s some volatility in the market. But it’s pretty easy to hit the outlier high growth companies with moderate bird, batch payback on a cap basis. Everybody wants to invest in it or most funds are looking into those. And so those deals can still get done. The earliest stage stop, I would probably guesstimate is getting done at 10 to 15% normal in terms of velocity and probably-

Jason Lemkin: That’s a lot different than you’d think looking at the press, right? 10 to 15%?

Keith Rabois: … Oh yeah, absolutely.

Jason Lemkin: A lot different.

Keith Rabois: I mean, 10 to 15% and add, probably call it 50% of the valuation of last year.

Jason Lemkin: If you’re growing faster than March 15th, how does that impact that calculation?

Keith Rabois: If you’re going faster in a way where also the unit economics/payback is improving and that’s actually true for some companies, like think DoorDash or some telemedicine companies as extreme examples, those are pretty fundable for two reasons or home fitness in some ways, maybe. I’m not sure whether the payback on the home fitness thing has changed that dramatically, the cut payback, but certainly the growth is there. Those companies are very fundable right now because basically, it’s like a version of the old why now question. So every good investor deck has why now slide. The post March 16th is just amplifying that question. Why is your company better post COVID? If you have a great answer to that, people will definitely be interested in funding you. It’s species of the old canonical Why now question. But if you don’t have a great why now question, then I think you’re getting lost in a quicksand in VCs that are polite but not really investing.

Jason Lemkin: Yeah. Let me just dig into that a little bit. I think this was the point you were trying to make with Faire, that it’s still doing incredibly well, just not quite as well as it would have done absent COVID-19, right? 2X instead of 3X.

Keith Rabois: Yeah, good. Literally, our plan for the year was to grow or plan for 2020 would be to grow more than 3X, which is great. I mean, for a company that had pretty good scale. But we’ll still put up 2X even with COVID, which by most metrics that’s a pretty good year. Maybe not be good enough for the company’s ambitions, but we’ll get back to 3X. But 2X year to year is actually not that bad in the grand scheme of life.

Jason Lemkin: Not that bad. Let me ask the question then for new deals and as you said, you’ve announced a ton of deals personally in the Founders Fund, but most of them were in flight before all this happened. One way or another in flight.

Keith Rabois: Yeah.

Jason Lemkin: For a new deal, that is like a Faire. Maybe not literally Faire, but let’s say in February you were at 2 million ARR tripling and you love the founder. Okay? It was in a good space, it’s growing 3X, unit economics are plenty good. Whatever your bar is, your bar is high but tripling, quadrupling going 2.5X and instead of 3X, now it’s 2X or instead of 3X, now it’s 1.8 X and it’s not [inaudible 00:20:29]. So, it’s not restaurants. Do you just do the deal? Do you just connect the dots and say, “I’m going long. I don’t really care if it’s eight to 20 months until this recovers.” Or what’s the honest answer for you and Founders Fund? Is it still tough to make that mental leap that it’s just a gap?

Keith Rabois: I think it depends on how much is this a temporary blip? Meaning can you articulate–Look, everybody’s going to have a weird set of metrics in late March, early April. Typically, when we’re funding a later stage company, they have this super smooth growth curve and everything looks amazing. Very few people are going to be presenting for the next year or two, slides that are perfect. Everybody’s going to have some volatility, at least in March and April. And so you can show that the volatility segment of time or time is pretty temporal and that you’re back on a predictable growth rate, et cetera, even if it’s a month to three months of that. I think there’ll be some serious interest in investing in companies like that.

Keith Rabois: I think you get basically a pass. In most companies you’re going to get a pass between March and maybe May in some of their metrics, but the metrics before that pass zone better be pretty damn good and at some point after that pass zone, they better start looking good again. If you can do that, I think people would just close their eyes to this middle zone, where typically in a growth round, and even a series of C can’t really get away with that. A missed quarter looks terrible typically. Everybody’s going to have a missed quarter or so.

Jason Lemkin: Got it. But for what I call them, the COVID beneficiaries, the COVID impacted and the COVID we don’t need you anymore. For the impact that I think you’re saying, look, it is hard. It’s a fact that it’s hard. Even if intellectually you know that these industries are coming back, you have to resume growth in two, three it sounds like, to get funded. You have to resume your normal growth.

Keith Rabois: Yeah. I think you do need to show that if you want more money, that the company has either figured out or at least the macro world has adjusted and so you’re back on whatever trajectory you’re on. Or the company has figured out how to tune what it does, whether in small tuning or large pivoting to the new world and that there’s evidence that whatever adjustments you made are working. If not that, then I think there’s not a lot of appetite to fund companies, especially if they’ve already raised a sizeable chunk of capital. It’s much easier and let’s say to raise sizable chunks, let’s call it 10 million or more. If you’re not able to show that the world has been fixed from whatever perspective and vantage point you’re in business or you fixed your company to take advantage of the new world, it’s much easier to pass at somebody who’s already raised a dose of capital. Just say, I’d rather take a shot at something new that’s built from the ground up in this new world.

Jason Lemkin: Yeah. Let me ask you a question that I’ve thought a lot about but you may have much better data and thinking, which is my gut–and I don’t have the data to support this but I have my anecdotal data. I’ve made 25 investments and I talked to a lot of founders. I think 15 to 20% of SaaS companies that we work with are COVID beneficiaries. 15 to 20% are in collaboration, sharing E-Learning, even just e-commerce. I invested in a company called Gorgias, which is a contact center for SMBs on Shopify. March was rough. April, it grew 70%. That was an unexpected one. If 15 to 20% are COVID beneficiaries, can that absorb all the venture capital? Does venture capital even need to bother? Venture capital, no matter how it looks, it’s not a huge asset class. Is it? Is there even any point for new investments in doing anything but a COVID beneficiary?

Keith Rabois: You could really argue that because if you believe that there’s a fundamental shift in the world in any way towards e-commerce verticals, towards ad foam, fitness training, et cetera, absolutely, it would make sense to take your money and only invest in COVID beneficiaries. There’s a big argument. We debate internally all the time. You can debate publicly. How much does human behavior snap back into traditional norms or is there a “new normal”?

Jason Lemkin: Now what’s the answer?

Keith Rabois: Well, I actually think it varies by vertical. I actually think that there are some things that have had a permanent change and people are not going to go back. For example, let’s talk about telemedicine just because it’s easy to grok. Telemedicine had been growing nicely for the last five to seven years. I mean, there’s a couple public companies, several private companies, but it’s had step function. What I mean step function, I’ll give you some real numbers. Stanford Hospital went from roughly 1700 telemedicine consults a day to 74,000 a day. Cleveland Clinic has roughly the same scale there. So massive step function.

Keith Rabois: What’s happened is people realize, actually, you know what, telemedicine is actually better. I don’t want to go to a doctor’s office where everybody else there has germs or something. I have to sit in this waiting room and the doctor’s never on time, whereas mostly 50 to 70% of things that go wrong with me, the doctor can easily diagnose or triage by a telephone call from my home when I haven’t even had a commute, let alone to get exposed to other people’s germs. And by the way, they’re probably on time for the telemedicine call. That I don’t think flips back at all.

Keith Rabois: Also, the companies, at least the private companies, get better marginal economics. I run a telemedicine wave. The regulators also stepped in and made things easier, relaxed some cross state border restrictions on practicing medicine. Unfortunately, I suspect they’ll go back to normal and insist the California doctors could only treat people that are in California, which makes no sense, but they had suspended that, which also allowed for this growth. But maybe even the regulators will cave now. I’m sure there’s no, maybe not no, but almost trivial negligible examples of California doctors either really screwing up the practice of medicine for Virginia residents. All of that is just a permanent change. Then you can even see, well, maybe if that’s true, maybe there’s applications that crossed to other versions or species of medical care where telemedicine or quasi-telemedicine takes off as well.

Keith Rabois: There’s some things that I don’t think are complete substitutes and really are unfortunate inferior substitutes. You can argue some of the… Even if you go into home fitness, break this down, I think Peloton is a pretty good substitute for SoulCycle for many people. Maybe superior, cost-effective, more convenient, more adaptable to their schedule, et cetera. I’m not sure the at home equivalent of weight training is for going to a gym. Most people are not going to have the same equipment, the space, et cetera. We funded a company that provides a really good at home experience called Tempo for strength training. But to some extent, there’s limits on what you can do in a normal person’s house in America, or apartment. I think that is a function of what’s the healthcare situation in estates, what’s the risk tolerance of people for getting exposed to germs? But are people going to permanently stay away from gyms if the healthcare crisis alleviates? I doubt it.

Jason Lemkin: Georgia doesn’t suggest it.

Keith Rabois: No, that’s true. Truthfully, the facts in Georgia don’t suggest that it’s as big a problem as people thought. But yeah, I personally wouldn’t want to be in a gym right now with a lot of other people. It’s just hard to keep everything perfectly sanitized all day long, even if you put density caps on. But I would imagine, you’ll see gyms, even the Equinoxes of the world, where you have to schedule your workout.

Jason Lemkin: Yeah. It’s complicated. Keith, this was incredible. I wish we could dig it even more but we’ve gone our full length of time. So thanks for anything. Anything else last minute you want to share? I think we’ve hit some amazing stuff.

Keith Rabois: That’s great. It’s a pleasure to be with you.

Jason Lemkin: All right. Stay safe and we’ll talk soon. Thanks everybody for joining.

Keith Rabois: Great. All right.


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