The Latest in VC Funding + Scaling SaaS: An AMA with SaaStr CEO Jason Lemkin (Pod 581)

Jason recently opened up an AMA on Twitter Spaces to answer questions about scaling and VC funding. Episode 581 of the podcast is an excerpt from the recording, and you can find the full transcript below.

 

Jason Lemkin:

Today certainly is an interesting week. If you didn’t catch it the other day ….and you can read about it on SaaStr …Microsoft and Google Cloud both had extremely strong quarters, Microsoft Azure grew 40% last quarter, and a record number of nine-figure and billion-dollar deals.  Having multiple billion-dollar deals in one quarter is pretty impressive. I think it’s a challenge to folks that think we are in some sort of terrible downturn for SaaS and cloud.

We certainly are in a downturn in some segments. While Azure and Google Cloud grew at record rates, Shopify for example, its SaaS business only grew 10% last quarter. So clearly there are areas of our economy that are slow growing and B2C has its challenges. But boy, seeing Microsoft hit all time record growth rates or close to all time growth and Azure growing 40% last quarter, I think should make folks feel pretty heartened about where SaaS and cloud are. Probably a good thing to talk about. Nathan, do you have a question?

Nathan W (@nwenzel):

Yeah. Hey man, thanks for pulling me up here. I’m actually in the midst of fundraising right now. We are post-term sheet moving along diligence. Everything’s going well. But one thing I saw was… Especially as we try to get follow on checks, we’re getting a lot of just hard passes where it’s clear that people aren’t interested at all. And the term sheet we got was preemptive.

Are you seeing this massive bifurcation of just there’s hard nos and there’s yeses in VC now and really there’s just nothing in between? Or is it really just kind of what people are saying, it’s like, well, it’s a slower process and it’s in a slow down.? Just curious if you’re seeing a middle where people are just binary on this then.

Jason Lemkin:

Well, that’s a good question. Obviously, you’ve raised before, and I’ll answer your question, but let me step back a bit.

I think any founder needs to realize this is a very different world than the last two years, of course, radically different. And then I’ll answer your question, even radically a bit different than what we’re used to. It’s radically different than the last years. Not just because valuations have been cut more than half, as they should be, because all the public stocks are worth half of what they were a year ago. If Asana is worth less than half than it was a year ago, and if Monday is… If so many leaders, even if Twilio’s worth 30% of what it was a year ago, of course, you’ve got to be worth less.

So valuations have reset and so have amounts raised. But I think going to your point, Nathan, what folks miss a little bit is how much crap VCs are digging out of, and that leads to a lot more hard nos. You’re a repeat founder, so I think almost any time through 2021, people would want to at least meet you. You’ve had an exit. And in fact, you have a great profile because you had an exit, and folks were like, wow, guys like this are often hungry. The next exit will be even bigger. Those are folks that build unicorns and decacorns. Stewart Butterfield sold… What do you call it? Flickr to Yahoo for 40 million. And then he sold Slack to Salesforce for 27 billion.

Jason Lemkin:

So you have like a great profile irrespective of what your startup’s doing. And that’s probably one of the many reasons your insider stepped up. But folks are so overwhelmed, still doing both portfolio triage, dealing with LPs, their own investors and figuring out where to put the money they have. And the fact that VCs have their own deployment paces that you’re going to hear probably at least until the fall, a lot more nos. And honestly, right now literally is the worst time to raise VC funding I can think of since 2016. And it’s not just the valuation, so what if you’re early stage to some extent? But you’re right, there’s going to be just so many nos and we can talk more about this. But if you take an average fund, and some of this is hard to perceive on the founder side, but folks started deploying venture funds every year.

Jason Lemkin:

It used to be every three to four years, you would roll out a fund. So you’d raise $100 million fund. You would take three to four years to deploy it for new investments, not follow-ons but new investments. And that shrunk to like two to three. And then, in the COVID crazy era, it shrunk to one year. Like top funds would raise… New VCs would raise new funds every year. And even the Tiger Globals and Vista would raise new funds every few months. And now they’ve dialed that back to every couple years because the LPs, their own investors are burnt out. And so that might mean I’m deploying capital at a third the rate that I was last year, a third the rate. And so combine all that, the stress, markdowns… Blackbird today announced they’re marking down Canva, which is one of the most iconic startups out there. They’re marking it down by 50%.

Jason Lemkin:

They are 33%, 40% just because of market valuations. So there’s so much stress here. It’s just easier to do a quick hard no. So maybe that’s frustrating, but look at the end of the day, a hard no, it’s frustrating, but it is a lot better than someone wasting your time. So, we can take some other questions, but if you got any other follow-ups, just let me know because you’re in the thick of things.

Nathan:

Yeah. No man, thanks. Appreciate it. And I think it is like, the partners that we talk to almost seem worried about if they don’t make a hard shift to nos, that when they go back out to their LPs to raise the next fund, they’re not going to be able to show that they just cut things off.

Jason Lemkin:

No, the LPs… And thank you. I’ll follow up. You don’t have to ask more. But it’s not that the LPs… LPs just want results. It’s just there’s multiple levels of triage. There’s dealing with your startup that was growing 80% last year and is growing 0% this year, and has 12 months of cash. That’s an almost unsolvable problem that most VCs now have a ton of to deal with. And they’ve probably cut the amount they want to invest in the next 12 months by half to 66% because of the math. They’ve cut the amount they want to invest. So when you’re getting 20 or 30 inbounds a week that are decent, that’s probably what most VCs get, 10 to 30 inbounds or referrals a week that are decent. Before, when you were deploying so much capital you take the meeting.

Jason Lemkin:

Today it’s just easier to say no, because there’s just so much noise and so much going on. So you just have to brute force it, and honestly, it doesn’t help you. But I can’t imagine a worse time to fundraise than now. And I think even if multiples are worse, even if the stock market is down in September, October, at least VCs will have processed all the ones that are struggling or hemorrhaging their portfolio. They’ll be through this cycle so folks will have more attention in September and October. And look, I’ll give folks a last story. I do have one company I’ve invested in that literally went from $1 to 15 million at almost record time and had about a 100 VCs that wanted to invest last year. And they recently raised and that 100 shrunk to two, so that sort of summarizes how crazy the venture market is. And mainly because VCs are dealing with all these crazy externalities and it can be almost overwhelming. Anybody else got one to ask?

Colin (@ctres):

Hey, Jason. Colin here, CEO of a startup, B2B SaaS, and raising a seed round right now. Last year offered checks of between five and 10, early. We had had two million in pre-seed. Now, going back to the same investors they’re like, we just want to see how things shake out. Have revenue, but early, so like 50K ARR after two months of charging for a product.

What are you seeing out there, is B2B even going to survive in the next two or three months of raise, we’re down to three months runway?

Jason Lemkin:

Yeah. Well look, there’s a lot of questions there. And I think one thing that sucks that doesn’t help you is that basically, last year’s playbook is worthless today. So much of the advice that you would get last year, it ended up being horrific advice. There’s a company that I invested in that last year got an offer to be acquired for hundreds of millions of dollars. Everyone said, don’t take it. The growth has slowed, and  I don’t think they could get an offer for 20 million today. That was horrific advice to the founders, to everybody. And so I know it doesn’t help, other than cathartic, but literally all the advice last year was terrible. But are VCs stupid? No, of course not. It’s just that the ground changed so quickly and so much.

Jason Lemkin:

I think the problem you have and… Look, I’ll give you the only shitty or crummy answer I have is just that last year folks that were sort of in between rounds, in weird places. Like you have 20K or 15K of MRR if you have 200K of ARR. You have customers, you have traction. People were so excited about SaaS when public companies were trading at 30 to 50 X revenue that they would want to take that meeting. Good CEO, does she have a heartbeat? Take the meeting. Now we’re back to old times where, hey, you’re a tweener. You already raised money. But in the old days, if you didn’t get to a million after your seed round, you were kind of dead. And my first investment ever in 2013, in the old, old days, was Pipedrive which ended up selling for well over a billion dollars cash during the peak.

Jason Lemkin:

But man, I invested at one million ARR and they struggled to… I’m not saying that I won the deal. I’m glad they picked me, but they struggled to raise, people didn’t get it. They’re like, oh, you only got to a million on your seed round, it’s like these gaps. And it sucks, but no one cared about gaps. Not just in ’21 and ’20, but for several years, no one cared about gaps with SAFEs and all this. But now, every VC is scrutinizing that gap. And I just got introed yesterday to a deal from someone I respect. And I think it’s a great startup, but they raised a seed round of a couple of million. And now they’re about a year run rate, and they need a boost, but they didn’t hit the milestones. And even me, who doesn’t care, I was almost that’s close to not even take the meeting right in today’s environment.

Colin:

Right. And we’re even a step earlier than that. We took a Pre-seed two years ago. Now, revenue’s coming in looking good. And at a seed round raise, we’re like, hey, what we think we’re going to need to raise in a competitive market because we’re in remote work space. We’re talking we’re going to need to raise between four and five. And doing that in Europe, everyone’s coming back and saying you need to take a slash of like a quarter of your valuation. In the US, it’s like, oh, we can pull this together, but it’s going to have to be a consortium of people to do it.

Jason Lemkin:

Got it. Yeah, well, I guess we could probably press on this forever. But it sounds like the bad news is you’ve got a limited runway. The good news is somehow you are creating conversations, there’s at least almost interest in the round. And the best advice I can give you today, to anybody, is be structurally attractive. So if you need four to five million, I get it. But can you make do with three or 2.8? Because it seems minor, but it’s not. You may totally change the risk profile of an investment by raising a little bit less. Let’s imagine you have a $50 million fund, and most VCs like to invest around one and a half to 2% of the fund at each significant deal.

Jason Lemkin:

So for a $50 million fund, a one million dollar check would be comfortable. For a 100 million dollar fund, a $2 million check would be comfortable. People stretched all the rules the last couple of years. But if you ask for two point something, you might be able to get two folks to write a million-dollar check, not worry if they lose their money, and get excited about the upside. As you push people out of their comfort zone, again in today’s world, going to Nathan’s point, they may just bail if you push them out of their comfort zone. So be thoughtful, ask for less. Don’t create drama around valuation or fund size. And I definitely think, if nothing else, today is the right time, if nothing else, to ask for the least amount that makes sense. Don’t ask for enough capital to make it nine months.

Jason Lemkin:

Nothing will spook an investor more, that’s flushing your money down the drain. But ask for the least amount that will really work. It’s not the investor’s problem if you have an expensive team. It’s not the investor’s problem if you need too many folks, because you’re a business CEO and not an engineer. It’s not the investor’s problem. So think about and ask questions, what would make this deal structurally attractive? And no one ever asks this question, but there’s so much behind the scenes. Even for me, I only do a few investments a year. But if someone comes in and tells me I’m raising 10 million, like I’m out.

Jason Lemkin:

There’s just no chance. And it doesn’t matter. You could make one exception every couple of years and founders don’t get it. So ratchet that down because I know it’s stressful, but it feels like you’re in the mix. And this advice of lowering the valuation 30%, that may be less about the valuation, although I’m sure they’re right. And it more may be about making the deal structurally attractive, so that no one’s worried about losing it. You just don’t want people to be worried about losing it.

Colin:

Yeah. It’s fascinating. And kind of the last question, the last point is that we’re a bottoms up growth, B2B SaaS, and there’s a great expand when land happens. How do you land? And especially for a very horizontal product picking a vertical, how much money do you need to actually really go start a proper product-led growth experience, because you got to do investments at the top of the funnel.

Jason Lemkin:

Yeah. But investors, VCs don’t care.

Colin:

And that’s the thing, the B2B SaaS VCs that we want to work with and talk with are like, hey guys, they have a better idea or they should have a better idea of what it takes from a check size to be able to do that in 12 to 16 months.

Jason Lemkin:

Yeah. Let me simplify it. And I get that some of this is marketing, and then maybe we can break. No, I don’t know of any SaaS investor in the world that wants that when they hear, hey, we need this money to create a flywheel. We need this money to get sales and marketing going. Just even hearing that you want to run for the hills. What you want is somebody already has at least the tiniest flywheel going, something going. And the money is just to facilitate it. So if you use this language like I need 4.5 million to get PLG going, for me that’s an instant hard pass. If you say, I need four million because we’re already growing 8% a month and I need to feed the engine.

Jason Lemkin:

This is how we feed the engine. That’s like, oh my God, that’s what anybody wants to invest in. So I just see this so many times you’ll see a deck, we need this money to get sales and marketing going. I believe you, it’s true, but venture capital is a weird niche thing that… Frankly, venture capital at any stage only wants to invest in folks that are already off to the races. It’s frustrating, but it’s true. And so that’s just a fact to deal with. But thanks for the question and feedback here.

Cameron Jo’van (@CamJovan_):

What’s your recommended approach for acquiring early-stage funding?

Jason Lemkin:

Well, it’s a big question. And all I can tell you if you’re early… I’m SaaStr, and we’re pretty much about folks that at least have a handful of customers or traction. But I guess if you haven’t raised venture capital before, a few maybe obvious and annoying things to know, but maybe I’ll throw it out. First of all, is, it’s horrible, but there’s just so many startups and venture capital doesn’t necessarily completely favor insiders, per se. But to a large extent, it does because there’s just too many startups. That’s why one of the many reasons Y Combinator is so successful. Is this as many companies are in why Y Combinator, at least it’s a filter.

Jason Lemkin:

It filters a hundred thousand startups down to… Even with a huge batch size, a bunch that are at least smart and thoughtful folks for the vast majority. That’s also why, as annoying as it can seem, getting recommendations from folks you know, from VCs that they know and trust, works so well because obviously, there’s just too many startups. And the later stage you go, actually, the fewer good investments there are. By the time you become a growth investor, like if you talk to growth VCs, late stage VCs, they know every company at that level. They know everyone, and if they don’t, someone on their vast team does. You get fired at a growth VC fund if you didn’t meet with Datadog on the way up. You don’t get fired if the fund didn’t invest in Datadog, but you get fired if no one met with them.

Jason Lemkin:

I’m not kidding, you literally get fired. But in the early stages, there’s just too many. So you’ve got to do whatever you possibly can to connect with those investors. And the only thing I can tell you is that, the less proven you are the more proof points you need, the more traction. As soon as you have… And depending where you are, this may not be helpful. As soon as you’re at like eight to 10K a month in revenue, that’s enough where amazing outbound will start to work to seed investor. If the emails are incredible, you can go to Saastr.com and do a cold email search. I put several cold emails that I got that I funded and you can see examples, they were great. I don’t think the cold email, at least with most B2B investors, works great pre-revenue, because it’s just hooray for your vision, where’s your proof point?

Jason Lemkin:

But I do think if you’re growing decently at even a 100K in ARR, so 8K and up in MRR, and you’ll have statistics. I have this many customers, we’re growing this great. Here’s my burn rate. Here’s how they acquire them. Here’s why I’m special. If you send that cold email personalized to every SaaS investor at eight to 10K or beyond, I think you’re going to get some meetings. That’s my best idea which is that, yes, it’s unfair. Yes, it benefits the privileged. Yes, there’s too many startups, but once you have revenue, people underestimate the power of cold email. Right when COVID hit, we did a virtual event called the New New in Venture. And I asked some of the best SaaS investors, David Sacks, Aileen Lee, Keith Rabois, Satya Patel from Homebrew, and you can read another blog post about it.

Jason Lemkin:

I made sure I asked all of these VCs I’ve known for a while, do you read cold emails? And you know what they all said? We read almost all of them, and we did this cold email investment this year. And they’re all looking for different things and I summarized it in a post. It’s just the cold email thing is tough before you have any revenue, because it’s too hard to differentiate. But thanks for the question, Cameron. Anybody else got a question to add? We certainly got a little bit here to add. Alex, do you have a question?

Alex Stoica (@heyalexstoica):

My question is what are the sectors or the verticals that are recession proof from your point of view, especially for the small teams. Like if you have a three people in a team, what do you think that is recession proof right now?

Jason Lemkin:

Well, look, I’m going to answer your question, and then I’m going to answer a larger question. Yeah, there’s a huge bifurcation out there right now. And that… Look, cloud infrastructure and established categories of enterprise software are close to recession-proof. They were recession-proof in the worst recession in our lifetimes in ’08 or ’09. You can go to SaaStr. And I literally shared all the data from when I was running Adobe EchoSign there. And you can see that churn went up, literally in the worst recession of our lifetimes, like gross revenue didn’t… Like new bookings didn’t go down that much in the enterprise. They really didn’t. And if you look again when I kicked this off, if you look from yesterday, from Microsoft to Azure and Google Cloud, those businesses are on fire. Microsoft Azure’s at incredible scale and it still grew 40% last quarter.

Jason Lemkin:

Now that’s down from 46% the prior quarter, but it’s insane growth. So anything that is tapping into what enterprises are buying at Microsoft, at Salesforce…Salesforce had a record quarter. At Snowflake, those are not recession proof, but they ain’t impacted all that much. And they ain’t impacted enough to start you as a startup. At the other end of the spectrum, Shopify SaaS business only grew 10% last quarter. So the closer you get to B2C, the more dramatic the impacts are in today’s weird world, so that’s the reality of the situation. The closer you are to B2C and, to some extent, eCommerce, you’re going to see more impacts in SMB, and in infrastructure, cloud and enterprise you’re going to see less. Having said all of that, I think the most important thing is that every section of our economy, at some level, is still experiencing massive growth and massive change.

Jason Lemkin:

So until you have achieved high market share in any segment, don’t let these so-called recessions be an excuse or spook you. Everything is exploding in software, everything. And yeah, this is harder for many of us than a year ago, but if your product is important, there are so many customers today. And I guess the last point I’ll give you is what we’re seeing… Here’s the real truth in what we’re seeing today. And I think anyone listening that is seeing their business decline or seeing issues, you guys have to be honest about this because what’s happening is the apps that we barely use are getting cut,, especially by SMBs. For example, yesterday, I hadn’t even logged into our little expense account at Saastr, but I did to approve something. And I saw a SaaS app that we barely use that we pay a ton of money on.

Jason Lemkin:

We’re going to cancel it. We can afford it, but I happened to see it, and we’re going to cancel it. SMBs are doing that every day. Any SMB that’s having any trouble is opening up their credit card statement and looking, hey, do I really need this software? What about this marketing software? This helpdesk, whatever. And they’re canceling it left and right. But no one is canceling the stuff that helps them run their business. No one is canceling ERP, Shopify is growing more slowly, but its churn is not up. So in today’s world, it’s a challenge to make your product much more valuable for your customers. Especially if you sell to SMB and mid-market, what can you do so that no one in their right mind will rip it out? I don’t hear enough startups having this conversation, not really. What can we do to increase our retention and make it so that our customers will never rip us out?

Jason Lemkin:

And one example that’s much larger, but if you go to SaaStr and look at the 5 Interesting Learnings, you can see Bill.com when Bill.com IPOed. And we’ve been an early Bill.com customer at SaaStr. I love them. And I love René, the CEO. We also did a great video and podcast together you can find on YouTube. But when they IPOed, they were just a SaaS solution to manage billing, bills for SMBs and it’s great. But when after like eight years they finally added a payment solution, and they didn’t just bolt on payments because it was trendy and to look like a FinTech. They did it so that all of our payments could be managed out of Bill.com. And for us, even for our little small business at SaaStr, like now 90% of our payments can go straight from Bill.com instead of having to be routed through our bank.

Jason Lemkin:

And that makes Bill.com so sticky for us. It’s not expensive as it is, but I’m not going to rip out something that not only tracks my bill approvals but automates all my payments. So what happened… Sorry, the reason I’m giving you an example for Bill is they IPOed with 100% NRR, which is pretty good for us SMBs. They’re now at 130 when they added much more value for their customers. So do that and, folks, have that conversation internally and build not just that cool feature, don’t just solve that feature gap. But build this stuff so that no one will ever want to rip you out. That’s the real answer in today’s world. And if your churn’s gone up radically and your growth is slowed, it’s because you don’t have those features. You’re not that important. So thanks for the question.

Brittany Fuller (@BAMarieFuller):

Hey, Jason. Brittany here. I wanted to say thanks for hosting this space, got some good advice from you, I think a few weeks ago… And also shout out to Allison, who’s my co-founder who’s also listening in the room. I do have a question about, so we are in sort of the final home stretch of closing our pre-seed. We’re just around 70K ARR.

Jason Lemkin:

Congratulations.

Brittany:

Thank you. We’re working with two funds that we really like, bringing them together. And currently, Allison and I are the only two people who sit on our board. And I realize that two isn’t a great number. Neither of the funds are necessarily asking for a board seat, but it’s interesting one of them is kind of advocating for the other to take a board seat.

Jason Lemkin:

I can tell you why, but keep going. Yeah.

Brittany:

Or potentially kind of working with us to set up kind of like an advisory board situation. I was hoping that we would be able to not bring any outsiders to the board until we raised a proper seed. Just because I’m thinking like at that point, we likely will have to give up a board seat to one of our investors. And then if we already were coming in with three, then they would say, oh, and that’s not a great number. We want it to be odd, so let’s bring in an outsider. And then all the way from our seed round we’ve kind of lost control of the board, which isn’t necessarily where we wanted to be by seed.

So just curious if you have some thoughts on how early to add board members?

Jason Lemkin:

Well boy, there’s a lot of questions in there around board and board management. Let me try to break them up a bit. And if I miss something, feel free to ask one quick follow up at the end. First of all, don’t worry about… Like there’s some dated thinking. Don’t worry about the fact that you have two folks on your board and that you’re tied. If you and your co-founder aren’t aligned today, and that does happen all the time, maybe you should quit. So don’t worry that there’s two. Then let’s break the rest into a couple of points.

Jason Lemkin:

I think that over the last few years, it has certainly been a group think. And I think YC and other leaders have accelerated this to not take any board seats at the seed or Pre-seed stage, save it. I would say until five or six years ago, a seed round, you always gave up a board seat. And then I would say going into 2011, it became quite uncommon. I’ll talk about that in a sec. But I think no matter what, the biggest downside out of that came that investors got less engaged. You didn’t get as much help. You certainly didn’t get as much support if you needed more money. So whether you literally add a board seat or not, this idea of having your investors on an advisory board or having at least investor meetings every 60 days, no matter what. Whether you add someone legally to your board, have investor meetings every 60 days for every startup on planet earth that has sold any material amount of shares. Have an investor meeting every 60 days. It forces discipline on you.

Jason Lemkin:

It forces your investors to pay attention. It forces you to prepare. It forces you to hone your thinking. And then when you add any leaders, a head of sales, a head of marketing, a head of product, they will present, as well. It will create external accountability, and almost every single startup I’ve worked with that has no 60-day investor meetings performs worse over time because of it. I can’t prove it to you, but I know it. I can almost prove it to you with the investments I’ve made. The folks that don’t have investor meetings every 60 days perform worse. But you don’t have to put anybody on your board to meet with folks.

Jason Lemkin:

So that’s my most important tip, have investor meetings every 60 days. And they all already seem to want to do it. Should you hold off having a board member added to the board until the next time? I say maybe yes, if they don’t want it. When the pace of investing was slower, say until about 2018, being on boards was a really big deal to VCs. And it still is to later stage VCs. Like, imagine you invest in Canva in this Series D, if you could get on the board, it could make your career. I remember I was at a board meeting with John Doerr from Kleiner Perkins when he invested at Slack at a billion, and they wouldn’t put him on his board. And it was like shocking, he just had to be an observer.

Jason Lemkin:

It used to matter to people. But what happened with pre-seed investors like you’re talking about, even seed, is folks did so many investments, no one wanted to be on the board anymore. Like they were too busy. And that’s why if you’re bringing two funds in, one is saying, no, let the other one be on the board, because they don’t want to commit the time. So that’s actually not what you want. You want them to both come every 60 days. So maybe do the investor meetings every 60 days.

Jason Lemkin:

Maybe don’t put anybody on the board i,f they’re not pushing. But at the end of the day, your board should look roughly proportionate to your cap table. So if you’re selling 20% of your company in the pre-seed round, then one out of five board seats should go to the pre-seed investors and so on. And we often skip that for pre-seed, but at the end of the day, it is fair to end up with the board seats that are roughly proportionate to ownership with two for the founders. So hopefully, that hit everything. Thanks, Brittany. Anybody else have a question that we want to ask that we didn’t get to?

Alex Stoica (@heyalexstoica):

Hey, Jason, I have a follow-up question regarding the previous one on recession-proof businesses. You mentioned yesterday or two days ago the example of Intercom that you used. And I’m wondering if you see opportunities like this, so for example, products that have a better price, that are even cheaper.

Do you think that it’s a good business opportunity to have the cheapest product?

Jason Lemkin:

Look, there may be a few exceptions, but in my career, I’ve never seen any really successful startup become successful because it’s cheaper. I did talk a little bit about how crazy it was to pay $450 a month for one seat from that vendor. And I stand by that comment. But even their money isn’t a reason to switch, it’s just a reason to feel ripped off. There are very few… And then I’ll finish the talk and then we can get a different question. But very few B2B products are commodities. There are certainly reasons to buy true commodities. I guess dirt from one person to the other, even if I’m not even sure dirt is a commodity, I’m sure stuff grows better in better soil. I know it for a fact, in fact. But they’re not commodities.

Jason Lemkin:

And importantly and founders miss this all the time, 99% of founders do not understand switching costs. The cost to switch from one vendor to another is so high. For example, that vendor we were just talking about that was expensive. Another vendor reached out to us and they said, “Oh, well, if that one’s hard for you, use us.” We’re like, great. And they’re like, “Well, we have to do a call next week.” No, I don’t want to do a call, I want to do it tonight. “No, we have to do a call. And then we have to talk about pricing and then we have to talk about deployment. And then what about data mapping?” Like, it’s too much work. It’s not worth it. I don’t care about saving the money. But when folks are making buying decisions, there are value vendors.

Jason Lemkin:

There’s vendors that have the same pricing as the market, and then there’s premium vendors. And this is the most important thing about pricing at the end of the day, is what type of… There’s three types of pricing. There is cheaper than the leader, and if you’re cheaper than the leader, it sends messages. Not just that it’s more inexpensive, but that it’s easier to use. It’s easier to adopt. It sends messages that you’re reflecting the fact that you have something great, but you’re not feature complete. Sometimes that’s the right message. Again, my first investment was Pipedrive. It didn’t do what Salesforce does and it doesn’t do till today. It was eight bucks a month at the time, it sends a message to the market. Then there are times when you actually want to be the most expensive vendor in the market.

Jason Lemkin:

And why would you want to do that? Well, you want to do that because it says that you are the most enterprise, the most secure, the most trustworthy. If there’s a vendor in the marketplace that maybe cuts some corners or is very SMB, and you’re the more enterprise, you charge more. Everyone in the world uses applications like WordPress and Automattic. We run SaaStr on it, and it’s great. But if you’re more enterprise than that maybe you should charge more, if you do more… I’m just picking one example of many, but anchoring high works well if you truly are the most enterprise solution.

Jason Lemkin:

But for probably the majority of us, similar pricing works best because it takes pricing out of the equation. If I cost the same as another vendor, then all my marketing, all my sales, all my initiatives can be around why I’m great, and not about pricing. Pricing can create lots of friction in sales and marketing. And when Asana’s nine bucks, and Monday’s nine bucks, and ClickUp’s nine bucks, they’re not all the same, but they were pretty damn close for a while. Taking pricing out of the discussion actually can dramatically simplify the vendor decision. So thanks for the question. Anybody else got one to add that we can help with?

Saprative Jana (@saprative):

Yeah, so I’m a solo founder and I am a developer myself. So I have been working on a SaaS product lately.

So in VC world is it okay to be a solo founder and have your own SaaS product? Are they looking for funding solo founders, if they have a team?

Jason Lemkin:

You mean a one-person startup?

Saprative:

So I have my employees and stuff, but I don’t have a co-founder.

Jason Lemkin:

I see. Well, look, it’s a good question. Some of the biases that venture capital had five years ago have gone away. Folks didn’t like to invest in spouse teams but that worked out pretty well at Canva. You would’ve missed Canva if you didn’t want to invest in a couple. So many leading companies are couples based, or spouses, or significant others, but that used to be seen as a terrible risk factor, just to pick one of many. Solo founders is one of them. Zoom… You may have heard of Zoom, right? Zoom certainly quite clearly has a solo founder. And you can go to SaaStr and search for Zoom and solo founder, and you’ll hear Eric Yuan talking about it. But it’s one where there’s significant bias today still for the solo founder, significant bias. And it’s not a gating item, but the simple answer is you have to go farther and better if you’re a solo founder. And the real truth is you probably need someone else to carry the burden.

Jason Lemkin:

And I wasn’t there at Zoom in the early days. And Eric was a solo founder, but he brought like a dozen great engineers from WebEx with him. And were they co-founders? No, but did he have an entire team that had worked together for a decade? Yes. I think that partially made up for it, even though it was hard for him to raise funding. So it makes it probably 50 to 80% harder to get funded, but I’m not sure I would manufacture a co-founder out of thin air like Dropbox did or others did just to make VCs happy, because they’ll probably see through it. I would instead elevate the one or two people on your team that are important and say, you’re a solo founder. And these are my top two leaders on my team that’s the best shot you have to get over the bias. Thanks for the question.

Saprative:

Yeah. So my question is right in case of a solo founder is there something that can be done? For example, you said I can have two people who are working in my company show them as my partners or something like that. Is making somebody in my team co-founder significant suggestion that you would recommend me?

Jason Lemkin:

No, thanks for the question. I would not recommend that. I think I said that and let’s move on to another question. I think anything… But let me make it more helpful to everybody. Anything that is too bull shitty to investors runs risk of blowing up on you. So promoting someone that is clearly not your co-founder to co-founder on a slide deck to make VCs happy, there’s some chance that no one will check. Don’t get me wrong. I think there’s a 20 or 30% chance that’ll work. But there’s a good chance it’s just going to blow up on you. So anything you say that is just for fundraising or is close to truth but isn’t, it’s going to blow up on you. I got an email last week from a founder in a space I really like. The email was great.

Jason Lemkin:

The energy was great. It was there. And from the CEO of the company, I opened up the deck and in the deck, someone else is CEO, and he’s the co-founder. And I’m not sure what happened there. He said, no, it was a typo. It wasn’t a typo. Obviously, the guy that was CEO looked like he had… I’m just judging by a small headshot, but it looked like he had about 20 more years of experience than the founder. Probably someone pushed him to bring in someone with a lot of experience or something happened. And some guy was CEO for a while and isn’t CEO today, and he didn’t update the slide. But as much as I like this guy and the data, I was just out. I don’t want to learn what happened. I don’t want to learn why he wasn’t CEO for a while.

Jason Lemkin:

If it was disclosed upfront or it was handled otherwise, I wouldn’t even care 1%. But having to discover on my own that he wasn’t CEO in the deck, but was now, is just too much. So don’t hide anything. Or if you do, just realize that there’s a really good chance it’s going to blow up on you, and you don’t want to lose the deal in today’s market. Thanks for the question. All right, we’ve got about six more minutes. Has anybody else got a question or two to ask? Lance, do you have a question?

Lance Korsun (@LKorsun):

So just quick question. Pre-revenue, but a lot of what I would call quote unquote “deals in the fire that you’re really close to signing, all, but there”. And I know the ink’s not there, so it’s never done until it’s done. But when you’re going into conversations with VCs, do you bring that into the conversation or is that back pocket, because it’s not done, it’s not done, right?

Jason Lemkin:

Yeah. I think it’s a good question that I think I tried to focus more post revenue, but I think this applies to anybody post or pre-revenue that’s not pretty late stage. Is like just be clear, you got to put all your best foot forward. What certainly is an instant pass for me and I think is very risky is when founders confuse the two things. When they say we’ve got customers that are really pilots or trials, or are in the pipeline and they have not closed. There’s nothing more to me confidence-sapping than when I see on the deck that SAP is a customer and you find out it’s actually not closed yet. I’m out. So that’s a simple answer. Then the more nuanced answer is, do you get any credit for these deals, for this pipeline?

Jason Lemkin:

I would say for me, almost none. I r.eally don’t care who you’ve almost closed. And maybe that’s because I’m originally a SaaS founder and CEO myself, I just don’t care. I don’t care it’s too subjective. I don’t care and I don’t invest into pipeline. But that’s me. There are many especially pre-seed investors who get excited about pipeline. They view pipeline as something to dig their teeth into. At least if the valuation’s appropriate. And they’re like, wow, I’m a pre-seed investor, I’m not seed. And I’ll take early-stage revenue risk but I don’t want to take nothing. I don’t want to take a non-sellable product. There is a type of investing, which is not me, but it is a good strategy of invest once someone has an MSP, a minimum sellable product. Not an MMV, but a sellable one.

Jason Lemkin:

And that’s a good way to do pre-seed investing. And If they have that and you’ve got 20 folks in your pipeline and they can talk to a couple, and they can say, “Hey, this is going to change the world. We’re getting there.” I wouldn’t invest but a lot of pre-seed folks would because you’ve got a lot that other folks don’t have. So be honest, be clear about where things are. Don’t overstate it, but don’t hide it either. Don’t be ashamed of it, it’s pipeline. And at the end of the day talk to more investors, because they’ll have radically different perspectives on whether that pipeline has any value. So thanks for the question.

Max Morales (@MaxMoralesChile):

This is Maxi Moralies from Chile. I have a question. Have you seen the move from Chilean startups that they are arriving to the US with a lot of money from programs like Startup-Chile. Are you aware of… Because most of them they don’t need pre-seed because they already have pre-seed and they are…

But do you have somebody looking for startups in other countries like South America or Europe that you will be willing to explore, because in the US I think is too crowded?

Jason Lemkin:

I don’t have this magic person, but let me see if I can answer a question a way that’s helpful to more folks. Do you mean do folks want to invest in Chilean startups today that are coming to the US? Is that the larger question?

Max:

Basically yes, because we have 300 startups every year. And many of them are getting acquired by either Uber, Jeff Bezos is putting money. So it’s a movement in Chile in particular because they have a lot of money from seed. Do you think you can look for other startups in that they are arriving to Chile, use it as a platform to get pre-seed?

Jason Lemkin:

I don’t know. I’m not aware in SaaS that Chile which is a niche market, it’s a small market, is some platform. I think maybe the larger point that I don’t have all the answers for, we’re learning together, is I think the pendulum on distributed investing is going back to the middle. When I started investing way back in 2013, my first investments was Pipedrive from Estonia. The second one was Algolia from France. The third one was Talkdesk from Lisbon, Portugal. They all had to come to San Francisco. My fifth one was Salesloft, which sold for two billion last year. They were in Atlanta, and Atlanta back then was seen as a risky place to invest. And that’s a long time ago. And during COVID, because everyone invested over Zoom, and because SaaS got so global, it wasn’t one, it was really both.

Jason Lemkin:

It was the globalization of SaaS and, investing over Zoom really meant most SaaS VCs during COVID, and especially when the market was on fire, didn’t care anymore. No one literally cared anymore whether you came to the Bay Area, whether you built your startup from… Hopefully, they cared about Tulum or something like that, but no one cared. Now people care, and the pendulum has swung back to the middle. And I don’t think there’s not that many VC firms that are forcing folks to move to San Francisco today. I’m sure it’s happening. And I think it’s still happening in the buyout market, where they want the founders close to them at late-stage buyout. But folks are worried about niche markets. Folks are worried if you are not in a tech center, they’re worried if you are not in Paris in France, or in London in England, or at least in New York, or maybe Miami, I’m not even sure about Miami, in New York if not the Bay Area.

Jason Lemkin:

And they’re worried. And that’s the best I can tell you is that in a way it’s a little bit harder to be a Chilean startup now than it was six months ago. And folks should adapt to that and realize that at the end of the day… Look, and most investors writing larger checks are now wanting to meet in person. And they are wanting to see the people and they would prefer that they are close to them. And they would prefer that the executives that they know that they can put into the startups. And so the pendulum is in the middle. SaaS is now distributed. We’re all running distributed companies, that’s never going back in the bottle. But the further afield you are from centers of excellence, it’s much harder to get funded now than I think six months ago. So thanks for the question. I think we could do one more if one person wants to slip in one last question, then we probably got to take a break.

Sep Armeen (@separmeen):

What’s your playbook for an oversubscribed party round for quarter four?

Jason Lemkin:

Well, just so I can help end on a good answer, for Q4 of this year? What do you mean by quarter four?

Sep:

Yes. Quarter four of this year.

Jason Lemkin:

Well, look, there’s no magic strategy. I will tell you one thing. I’m going to write this post on SaaStr, I keep meaning to write it. I call it Funding Magicians. There are some founders I’ve invested in that are funding magicians. The number one best one of all is Mathilde from Front. I invested in Front as an angel very early when they first came to the US back in 2014. And every round Front has done it… And they’ve had some ups and downs, they just raised at 1.7 billion sort of before the downturn. But every round I watched from the seed to the A, to the B, to the C, to the D, it all happened like magic. The valuations were high. They were oversubscribed. The dilution was optimized. Everything was great. And why is that a funding magician?

Jason Lemkin:

I’ve seen several others and everyone’s different, but some founders just constantly work with VCs, are magnets for them, have the right type of charisma and treat it like drip marketing. And they keep engaging with them again and again. And these funding magicians have the right products that people understand. They have the right type of charisma, the type that VCs overwant to invest. And a lot of folks don’t know a lot of founders are quirky, and three they work at it every single week. So when folks like Mathilde send out an email saying I’m thinking of raising, 10 or 12 people have already wanted to invest. Now I’m using that as an extreme example, but most folks don’t do that. Most folks do episodic fundraising and they ask for help at inbound. They go out and raise it around.

Jason Lemkin:

But these ones that make it effortless really make it a 52 week a year project. So that’s really the answer at the end of the day, is building constant relationships every week. And I have an old SaaStr post on it. But I think worst case, if you can, meet one VC a week. Look, if you don’t know anybody and nobody wants to meet with you, then don’t do the meeting. But folks blow off investors or they think they’re not good enough. Or they think they’re associates or too junior, whatever. No, every week, do at least one Zoom with the best meeting you can get. If it’s Aileen Lee, take that one. Right. But if it’s some junior analyst from a fund you barely heard of but you don’t have a better meeting, do that because you don’t know where it’s going to go.

Jason Lemkin:

That’s the best way to do it. And the last point I’ll say, and then we can break and thanks to everyone is, enough with the party rounds. You may well get an oversubscribed party round in Q4, but this is not 2021 or 2020. Things are tough out there, and the best party round today is the round that just gets done. Not that’s… Oversubscribed would be nice. And if your metrics are insane, go for it. But the best way to get a great party round in Q4 is just to figure out the best group of folks, or best one investor that can just fund the minimum that you need and just close it. Now is the time.

Jason Lemkin:

Never close crummy investors, try never to take money from folks you don’t want to work with. But now is not the right time for too much hubris, too many games, and too much running a process. Now is the time, is if you can find an investor that you can trust on a deal that’s remotely fair to close it. So thanks, everybody. We’ll try to do another one of these next week, and appreciate everyone’s questions. Thanks, you guys.

 

Published on August 12, 2022

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