Jason Lemkin: Cold Email Tips; Why Only 15% of Founders Listen to their VCs | 20VC #954

Investment Philosophy & Sourcing Strategy

• Inbound-Only Model: Jason Lemkin invests exclusively in high-velocity inbound emails from "SaaStr superfans," having found all outbound efforts and warm referrals unsuccessful.
• Signal of Quality: The most critical signal in an inbound email is the founder's ability to communicate; Lemkin judges the company and human potential entirely based on the quality of the initial outreach.
• Exceptions to the Rule: Lemkin admits to missing "Monday.com" (originally "Harry and Jason's Wedding Rentals") because their initial email was poor, demonstrating that while inbound is his strategy, it is not foolproof.
• No Standard Format: There is no single "perfect" email format; top investors like David Sacks, Keith Rabois, and Jason Lemkin all have radically different preferences, ranging from two-line summaries to lengthy decks.
• Target Ownership Thresholds: Lemkin now targets minimum ownership of 10% per investment, with a goal of owning 20%+ of at least one startup per batch to achieve fund-level returns, moving away from his earlier "small check" strategy.

Case Study: Algolia (The Second Investment)

• Deal Sourcing: Algolia was a missed opportunity for a year until an automated email reader flagged it, leading to a meeting with the French founders before they returned home.
• Initial Investment Terms: Lemkin invested $500K at a $12M pre-money valuation; this was a "valuation-sensitive" choice to avoid dilution, though he later recognized it limited his ownership.
• Subsequent Participation: He participated in the Series A with a $3.5M investment.
• Valuation Lesson: Lemkin acknowledges that his focus on valuation sensitivity in 2014 caused him to miss out on doubling his ownership for a "modestly higher" valuation, a mistake he corrects today.
• Reason for Investment: The decision was driven by Lemkin's personal history as a founder where search infrastructure (Lucene) failed daily, creating a deep empathy for the problem Algolia solved.
• Competitive Landscape: Lemkin views competing with free open-source alternatives (like Elasticsearch) as a strong positive signal, as it proves the product must be "magical" or "10x better" to gain early traction.
• Market Size Validation: Lemkin used a heuristic of early hyper-growth (25% monthly) to infer a large Total Addressable Market (TAM), rejecting the initial $2M TAM estimate as mathematically impossible given the growth rate.
• Management Transition: Algolia experienced a plateau until founder Nicolas Dessaigne waited until $40M ARR to build a management team, at which point he eventually stepped down as CEO to allow for better scaling.

Venture Capital Practices & Industry Trends

• Founder Competence Rule: Lemkin advises operators-turned-investors to only back CEOs who are demonstrably "better than them," noting that product quality decays if the founding team is not superior.
• Speed vs. Perfection: Rapid iteration is the primary driver of success in B2B; great teams ship more iterations (e.g., 40 story points vs. 30) which compounds into a massive competitive advantage over time.
• The "Zombie" Company Risk: Companies raising massive capital pre-product-market fit (PMF) often become "zombies" with infinite runway but no growth, creating a lack of urgency that Lemkin views as a risk for both founders and VCs.
• LP Market Dynamics: Lemkin predicts significant churn among Venture Capital firms in the next 12 months as Limited Partners (LPs) drop managers who do not outperform other asset classes, despite overall confidence in the asset class.
• Brand Decay & Social Media: Lemkin argues that VCs must actively nurture their brands across evolving platforms (e.g., TikTok, Quora) to maintain deal flow, as brand equity is essential for top-tier founders to select the fund.
• Solo GP vs. Partnership: Lemkin identifies a lack of a co-founder as a personal failing, asserting that true partnerships with a second partner are "mega-accretive" for performance and decision-making.
• Remote Due Diligence: Lemkin admits to being a "worse investor" in a remote-first world, citing the loss of trust-building socialization and the increased transactional nature of modern fundraising.
• The "Why Didn't They Do It?" Fallacy: Lemkin dislikes the question "Why hasn't Google/Salesforce built this?" and prefers the "Columbo" approach of asking founders to explain the nuanced reasons why incumbents haven't built the product, which validates the market opportunity.

Feedback & Board Dynamics

• Direct Feedback vs. Sugarcoating: Lemkin prefers immediate, hard-hitting feedback over months of sugarcoating, noting that only about 15% of top founders can truly absorb direct criticism without resentment.
• Adverse Selection: Lemkin refuses to invest in founders who do not love his brand ("SaaStr"), viewing their lack of enthusiasm as a signal that the relationship will fail or that they are using the VC as a "sounding board."
• The "Killer" Instinct: Lemkin suggests that the "hunger" and fear of failure that drive aggressive investment decisions often decay as VCs become wealthy and secure, potentially leading to less fertile investment periods.
• Platform Bench Depth: Lemkin advises Harry Stebbings to hire more senior leaders (GMs/CEOs) under him to scale his platforms (20VC, SaaStr) and avoid burnout, noting that he currently lacks the bench depth to maximize his empire.

Algolia Specific Q&A

• Pre-Mortem View: Lemkin believes B2B startups rarely die from market forces but almost exclusively from founders "killing" the company themselves or making bad management hires.
• Valuation Ceiling: Early European investors passed on Algolia because a $12M pre-money valuation implied a $50M exit cap, which was too small for their fund structures; Lemkin saw the potential for a billion-dollar outcome.
• Key Value Add: Alex Kyle from Salesforce Ventures receives significant credit for championing Algolia early and serving as a board observer during rocky rounds.
• Future Outlook: Lemkin predicts Algolia will remain dominant in the e-commerce and SaaS verticals, driven by the enduring need for search, despite the difficulty in predicting specific technological shifts over a 10-year horizon.