Interview, Fireside Chat
Jason Lemkin: Every VC has a FRAUD in their portfolio; The IPO market is about to EXPLODE | E1046
- Jason Lemkin predicts 2024 will be rich with IPOs, featuring solid multiples, though a return to the frenzied 2021 market is not expected for another 20 years.
- Lemkin advises new venture managers to prioritize making a "winner" in their first 12 months to build a career-defining reputation, even if it contradicts traditional advice to "not burn the fund."
- Lemkin's first five investments (Pipedrive, Algolia, TalkDesk, Parklet Greenhouse, Salesloft) included five unicorns or near-unicorns within 13 months, a success he attributes to sticking to his specific "sweet spot" of SaaS verticals and founder backgrounds he understood.
- Lemkin rejects "outcome scenario planning" in favor of "ownership targets," arguing that valuation becomes irrelevant if the investor can secure double-digit ownership, though he acknowledges this is becoming mathematically difficult for his fund size at current valuations.
- The seed stage is experiencing a "splitting" of rounds due to massive liquidity among insiders (founders/executives from 2020-2021) who are eager to angel invest, creating an oversupply of small checks that makes it easy for founders to raise without traditional leads.
- Lemkin advises founders to avoid struggling for a single large institutional seed check if they can assemble a "splintered" round of many small checks from connected insiders, as "insiders are priced to perfection" while "outsiders" remain better priced for traditional seed funds.
- Lemkin argues that while multi-stage funds are writing smaller checks due to "dry powder" and the need to stay in market, this creates a "distracting" environment that undermines price discipline for traditional seed investors.
- Lemkin disagrees with the notion that seed investors can no longer participate in hot startups; he contends that "hot" seed rounds (e.g., $700M pre-money) are a problem for mega-funds, but seed funds should target "outsiders" and unproven founders who are not priced to perfection.
- Lemkin emphasizes that "inbound" outreach remains a viable strategy for seed investors (citing examples like Keith Rabois, David Sacks, and Satya Patel), whereas growth-stage firms generally do not respond to raw inbound emails.
- Lemkin warns against "Zerf" (Zero-Effort, Zero-Runway) startups with 10 years of runway and no traction, labeling it a 2021 anomaly that will not recur for decades; he advises founders with such situations to offer to return the capital to their investors.
- Lemkin expresses frustration with the modern founder mindset that lacks respect for venture capital capital, noting that founders often view fundraising as a game rather than a partnership, leading to ethical breaches where founders refuse to return capital despite failed business models.
- Lemkin prefers investing in "2X founders" (serial entrepreneurs) at a 2x premium to de-risk investments, though he notes his specific fund structure limits this strategy to pre-revenue stages, where the success rate drops to roughly 50% compared to 90% for his average portfolio.
- The Series A and B markets are characterized by a disconnect where founders expect easy raises based on 2021 metrics, while investors demand rationality; Lemkin suggests this will result in a wave of failures or long delays for companies that do not adjust their expectations.
- Lemkin identifies the current growth stage (Series C/D) as the "best place to invest" for SaaS companies, provided they are efficient (15x ARR multiples) and have 30-50M+ in revenue, as there is a lack of high-quality candidates due to companies being priced out of their current valuations.
- Growth investors are actively pursuing secondary transactions to buy out early-stage investors at lower valuations (e.g., 10x ARR) rather than waiting for primary rounds at 15x ARR, creating liquidity opportunities for early investors.
- Lemkin observes that top-tier LPs (university endowments, sovereign wealth funds) are not seeking immediate liquidity via secondaries; instead, they prefer high net returns and some have even requested to "reopen" closed funds to deploy more capital into high-performing managers.
- Lemkin predicts the "megafund" model ($2B+) will face massive churn as the math becomes impossible to satisfy with current market dynamics, leading LPs to consolidate capital into mid-sized funds ($250M-$750M) that have proven track records and DPI.
- Lemkin has shifted his stance on the "distributed work" model, becoming pessimistic about the work ethic of the current generation of tech workers, arguing that the post-2021 "easy money" era has left many employees unmotivated and inefficient.
- Lemkin is confident that the IPO window will open significantly in the back half of 2024, driven by a need for 10x+ "iconic" underpriced IPOs (like Stripe or Databricks) to reignite public market appetite for SaaS companies.
- Lemkin bets on a "flood of SaaS IPOs" in late 2024, noting that there is a pipeline of companies with $200M+ ARR waiting for the right market conditions, with the process taking at least 6 months to complete.
- Lemkin warns that traditional "confirmatory due diligence" is a systemic flaw in VC, where investors often only seek validation for deals they have already decided to make, leading to inevitable fraud in every portfolio that is often masked rather than addressed.