Ed Sim & Jamin Ball: Did Figma Kill M&A Markets & 3 Requirements to IPO in 2024 | E1101

Market Cycle & Investment Landscape (2021–2024)

• Capital Deployment Trends:
  • Venture capital fundraising for US software companies (Seed–Series A) and later stages (Series B–E) peaked in 2021–early 2022 and has since declined 90% to 2016–2017 levels.
  • 2021 represented an anomaly where five years of normal fundraising was compressed into an 18-month period, creating a "bubble" of overfunded, late-stage companies.
  • Inception/Seed Valuations: Unlike later stages, inception and seed round valuations remained elevated in late 2023, driven by late-stage investors pausing growth rounds to invest in early ideas at lower multiples (40x–50x vs. 100x) to secure entry before price discovery completes.
  • Runway Reality: While many companies possess 24–36 months of cash runway, Jarmin Ball notes that extending runway without growth is insufficient; companies must address whether they have a viable business model before cash runs out.
  • Growth Requirements: Public market standards for software companies now require cash-flow breakeven and sustained growth of 30%+; the "Rule of 40 or 50" (growth margin sum) is increasingly expected to lean heavily toward growth.

Exit Strategy & M&A Dynamics

• M&A Market Constraints:
  • Regulatory Environment: Large-scale M&A is expected to remain difficult in 2024 due to heightened antitrust scrutiny (exemplified by the Figma/Adobe and Zoom/ServiceNow scrutiny), particularly in the US, EU, and Ireland.
  • Deal Types: The market will likely shift toward "acqui-hires" and strategic acquisitions of tangential products (e.g., Snowflake's acquisition of Samoa) rather than massive platform consolidations.
  • Acquirer Capacity: Major acquirers (e.g., Palo Alto Networks) are selective, often evaluating 5+ candidates to acquire 1 or 2 companies; this creates a "musical chairs" scenario where many late-stage startups compete for limited buyers.
  • Valuation Compression: Late-stage investors are increasingly accepting 1x returns (capital return) to facilitate exits, recycling capital into new opportunities rather than holding illiquid positions.
• IPO Outlook:
  • Market Readiness: IPO windows are technically "wide open," but companies must be willing to accept down-round valuations relative to 2021 highs.
  • Prerequisites: Successful 2024 IPOs generally require cash-flow breakeven, 30%+ growth, and movement toward a Rule of 40/50.
  • Structural Enablers: Unlike 2008, 2021-era cap tables lack heavy anti-dilution ratchets, making down-round IPOs structurally feasible; the primary friction is managing employee trust and stock option dilution.
  • Strategic Rationale: Going public provides liquidity for early employees, creates a public currency for future acquisitions, and forces operational discipline ("getting fit") via public market scrutiny.
• Private-to-Private Transactions:
  • Expect an increase in private-to-private secondary sales or recapitalizations for companies needing to add product lines to build a defensible platform narrative before a potential IPO (e.g., Airtable-like scenarios where cash is returned or retained pools created).

Founder & Investor Strategy

• Valuation Discipline:
  • Raising at 100x revenue multiples (e.g., Hopin) creates an "impossible exit" math problem, requiring 10x–13x revenue growth just to return principal after multiple compression to 10x public market norms.
  • Early-Stage Caution: Founders are advised to raise smaller, milestone-based rounds to avoid cap table risks and preserve future exit flexibility; Ed Sim notes a shift toward "religion" where founders reject inflated valuations.
• Board Dynamics & Honest Conversations:
  • Boards must initiate difficult conversations with founders earlier regarding business viability rather than "kicking the can down the road."
  • Investor Alignment: Early-stage investors often prefer 3x returns via a 10x valuation drop, whereas late-stage investors may prefer 1x returns to recycle capital.
  • Founder Friendliness: True founder friendliness involves forcing hard decisions (exits/down rounds) rather than avoiding conflict; founders may initially react with resistance ("fuck you") but often recognize the exit as a relief once realized.
• Selection Criteria for Winners:
  • Market Size: Most companies "peter out" at $50M–$100M ARR because they failed to penetrate the enterprise market or lacked "strategic real estate" to expand from point solutions to platforms.
  • Founder Quality: Only "special" founders (often repeat entrepreneurs with prior exits, e.g., David Skok, Parker Harris) can successfully execute massive platform plays from day one; average founders should start narrow and expand.
  • Forecasting Errors: Common mistakes include assuming 20–40x revenue multiples would persist post-COVID and underestimating the need to transition from "market fit" (forced adoption) to "product-market fit" (organic demand).

Specific Opportunities & Forward-Looking Statements

• Sector Trends:
  • AI Security: Ed Sim identifies a new category of "AI security" and "ML SecOps" (e.g., Protect AI) as critical for enterprise adoption, driven by the need to secure data and models (ML Bom).
  • Data Infrastructure: Jarmin Ball highlights the necessity of data strategy before AI strategy, pointing to data lakehouse platforms (e.g., Tabular) as key growth areas.
  • Edge AI: Long-term bullishness on Apple's ability to run machine learning models on edge devices, though immediate revenue impact is not expected in 2024.
• Geographic Focus:
  • Ed Sim remains bullish on Israeli founders, citing high resilience and growth in security and infrastructure despite geopolitical tensions (e.g., two Israeli startups in his fund growing to $2M ARR while one founder was on reserve duty).
• Optimism & Vintage Selection:
  • 2024 Vintage: Both speakers view 2024 as a potentially "special" vintage where capital is deployed at valuation-adjusted prices, founders are building businesses correctly, and a new technology shift (AI) is beginning.
  • LP Strategy: Investors should avoid "picking vintages"; instead, LPs should diversify across manager selection and invest in the best funds regardless of vintage timing.
  • Market View: The industry is moving from a transaction-driven world to a relationship-driven world, where long-term board support is more valuable than short-term deployment pressure.

Quick-Fire Insights

• Best Investment Advice Received:
  • Ed Sim: "This shit is really fucking hard and it takes a long time; you have to ride it out." (Key actions: Cheer, Challenge, Chill).
  • Jarmin Ball: "Cool is the enemy of reality"; returns come from boring, tangible problem-solving, not sexy consumer social trends.
• 2024 Market Calls:
  • Long: Microsoft (AI leadership in cloud), Apple (Edge AI privacy advantage).
  • Short: Apple (immediate iPhone growth concerns, though long-term AI potential is strong).
  • Under-the-Radar: Tabular (data lakehouse) and Protect AI (AI security).
• LP Misconception: The belief that venture is easily timeable by vintage is a misconception; manager selection is the primary driver of returns.