Interview, Fireside Chat
Jason Lemkin: WTF is Going On in VC? Are LPs Investing in New Funds? | 20VC #965
- Investors anticipate a reset in investment criteria to prioritize top-tier growth combined with top-quartile capital efficiency, resulting in significantly fewer high-quality deals available.
- SaaS capital availability is projected to contract to approximately $100 million across all rounds, compelling a return to capital efficiency with revenue targets of $100 million to $200 million required within seven to ten years to facilitate an IPO.
- A new market baseline of 5x ARR is expected, while the era of massive, one-year revenue explosions and exits for number three or four category players is deemed over.
- Public market multiples are predicted to rise by 20% to 40% by the end of 2023, yet this recovery will not restore 2021 returns, and late-stage growth investors will remain largely sidelined except for top decile companies valued at specific metrics like 15x ARR.
- Founders face a binary funding outlook where those currently unfundable are unlikely to become fundable by year-end regardless of market multiple improvements, and new fund managers lacking 2021 cash exits will struggle to raise subsequent capital.
- Operational risks include pipeline shortages from aggressive marketing cuts, sharp burn rate increases for companies failing to build sensitive financial models assuming they are unfundable, and equity forfeiture for employees in 2023 billion-dollar valuations unless a massive $10 billion exit occurs.
- Specific sectors including healthcare, e-commerce, mobile, and infrastructure (such as MongoDB or Okta) are expected to outperform broader economic headwinds, whereas founders with excessive ten-year runways face varied outcomes ranging from inaction to forced consolidation.
- The competitive landscape requires founders to demonstrate specific conviction on winning against competition, with the competition slide regaining prominence, while the era of mass talent influx has ended, replaced by a perception of lower quality entrants.
- Structural shifts in the venture ecosystem include the potential death of many micro-funds, reduced LP checks, and a "strategic retreat" mentality that harms startups persisting longer than a quarter.
- Founder demographics and behaviors are cited as critical differentiators, with mature founders better equipped for volatility compared to the extreme emotional volatility of younger teams, while many experienced founders may quit prematurely during the downturn.
- The Figma exit is viewed as a potential distribution "saving grace" for LPs but is expected to be insufficient to offset the massive pool of capital currently in the market.
- Investment strategies focusing on public market shares of companies like Shopify are predicted to cause venture firms to miss opportunities, while a market settlement into a new thesis will see investors adjusting their worldview based on recovery or further decline trajectories.