Interview, Fireside Chat
Jason Lemkin: WTF is Going On in VC? Are LPs Investing in New Funds? | 20VC #965
- Market Sentiment Shift: The "Postmates Effect" (where #3 or #4 competitors could achieve billion-dollar exits) is over; the market is resetting to a state where only #1 contenders or those with extreme capital efficiency can succeed.
- Investment Criteria Changes: VCs now demand a "trifecta" of top-tier growth, top-quartile capital efficiency, and a clear path to $200M ARR for IPO viability, whereas previously the focus was solely on growth.
- Valuation Multiples: The dominant SaaS investment thesis has shifted to a 5x ARR multiple; top-tier opportunities are now seeing bids at 15x ARR for profitable companies or those with Net Retention Rates (NRR) over 100%.
- Equity Reality for Employees: Joining a private company valued over $1B in 2023 is described as a "sucker play" for employees, as even "generational" companies like HashiCorp or GitLab are expected to exit at valuations ($5B–$10B) that leave most staff underwater, unlike the pre-2021 era.
- Capital Availability: Micro-funds ($3M–$10M) and first-time managers without 2021 "billion-dollar cash exits" face high risks of being decimated; LPs are reluctant to add new managers and prioritize consistent deployment over speed.
- Marketing Strategy: A prevalent error in the current downturn is cutting marketing budgets too aggressively; while immediate revenue-focused marketing is necessary, long-term pipeline building is being neglected, leading to a pipeline shortage by year-end.
- Founder Maturity: Investors are gravitating toward mature, "seasoned" founders who can weather volatility without emotional outbursts, while noting a decline in the quality of hires in the mainstream tech workforce over the last three years.
- LP Distribution Dynamics: LPs' performance metrics are currently inflated by 2021 exits realized in 2022 (e.g., Figma, SalesLoft), creating a potential "cliff" in 2023 where new funds may show zero distributions (DPI) despite having quality portfolios.
- Funding Outlook for 2023: Public market multiples are projected to rise 20–40% by year-end, but this will not restore 2021 valuation levels or returns; companies unfundable today will likely remain unfundable in the "recovery."
- Sector Performance Variance: The downturn is not uniform; healthcare, B2B e-commerce (e.g., Shopify, Gorgias, Algolia), and mobile subscription management (e.g., RevenueCat) are showing resilience or re-acceleration, while startups dependent on overfunded tech consumers are struggling.
- Operational Advice: Founders must build "worst-case" sensitivity models assuming missed growth targets to accurately forecast burn rates, rather than relying on linear projections.
- VC Deployment Strategy: Successful VCs are advised to ignore public market volatility (e.g., buying Okta or Shopify shares) and focus exclusively on finding the next private "unicorns" (e.g., the next Pipedrive or Algolia).
- Post-Product Revenue Sweet Spot: Early-stage investors (pre-revenue) face high uncertainty in SaaS; the ideal entry point is post-revenue ($20k–$40k ARR) where founder execution capability can be verified against actual customer data.
- Founder Resilience Benchmark: The speaker notes a "lack of sympathy" for founders who cry or quit quickly during this downturn, viewing emotional volatility as a sign of poor preparation for the inherent difficulty of building a company.
- Unlearning Past Lessons: VCs who invested heavily in the 2021 bubble are now "unlearning" the belief that bad founders, sociopathic CEOs, or lack of market understanding could lead to massive exits; the bar for entry is now "insanely high."
- Strategic Retreat Warning: While a brief "strategic retreat" to cut burn is acceptable, founders who remain in retreat for a year risk failing to recover momentum.
- LP Re-up Requirements: LPs are unlikely to re-up managers who deployed capital too rapidly (causing unexpected capital calls) or too slowly, preferring predictable, relationship-driven capital allocation.