In a dynamic roundtable discussion on "20 VC," host Harry Stebbing convenes with venture capitalists Sam Lessin of Slow Ventures, Jason Lemkin of SaaStr, and Frank Rotman of QED to dissect the evolving landscape of seed investing. The conversation delves into the end of the "factory model" of predictable startup success and the implications for seed funds, which now face a return to bespoke, high-risk, high-reward strategies. The group debates the future of venture capital, emphasizing the need for startups to be capital-efficient and profitable early on, rather than relying on subsequent funding rounds. They also touch on the role of accelerators like Y Combinator, the impact of rich tech executives in seed rounds, and the prospect of upcoming IPOs in a shifting market. The consensus suggests a critical reevaluation of the venture model, with a focus on sustainable business growth and a potential reduction in the number of high-value public offerings.
"The seed deals that have mattered have always been the ones that were hardest to package. They were not on the factory line."
This quote emphasizes that the most impactful seed deals are those that defy standard packaging and don't fit neatly into a predefined investment process. These deals are unique and don't follow a cookie-cutter approach.
"My view when I say that seed is dead is that I think the factory model of seed, which supported massive scaling of it, is dead."
Sam Lessin suggests that the systematic approach to seed investing, which allowed for scaling and predictability, is no longer effective. The seed industry is returning to a more individualized and uncertain model.
"2017 to 2021 era was the era of Alphabet soup, right? So you had an a round, a b round, a c round, a d round, an erround, an f round, like extensions."
Frank Rotman describes the recent period in venture capital where startups went through numerous funding rounds without proper de-risking at each stage.
"The seed deals that have mattered have always been the ones that were hardest to package. They were not on the factory line."
Sam Lessin reiterates that the most successful seed investments are those that are not easily standardized or packaged, highlighting the bespoke nature of successful venture capital.
"One of your partners will, who I spend a lot of time with, he said one of the flaws of the past few years is that everyone was trying to earn the right to do the obvious, trying to earn the right to win these deals that everybody thought were good deals."
Frank Rotman shares insights from Sam Lessin's partner, highlighting the past trend of chasing deals that were perceived as "obvious" wins but resulted in overvaluation.
"If pricing doesn't correct at the earliest stage, you're going to have a lot of no bids at the series A because they wouldn't have gone far enough fast enough for a series a investor to come in and say they've earned their way into a significant increase in valuation."
Frank Rotman explains the consequences of seed stage overvaluation and its negative impact on the ability of startups to secure Series A funding.
"Capital if you've overfunded yourself at the wrong valuation early on, for sure."
This quote highlights the risk of overfunding at an incorrect valuation, which can lead to difficulties in raising future capital.
"I don't think any founders are listening to these terrific insights on Twitter. I don't think that they are ratcheting back their valuation expectations."
Jason Lemkin expresses skepticism about founders' willingness to moderate their valuation expectations despite advice available on platforms like Twitter.
"We'll basically no bid lots of stuff where we don't see the huge asymmetry at this point."
Sam Lessin indicates a shift in investment strategy where investors are more selective, only engaging in opportunities with clear asymmetrical return potential.
"The fundamental flaw in the discipline is that those thousand x return companies only exist in areas where TAM probably is unlimited, or TAM probably is extraordinarily large."
Frank Rotman identifies a misconception in the venture industry, where it's assumed all companies have the potential for unlimited market growth, which is not the case.
"Companies need to learn to make money at low levels of scale."
Frank Rotman emphasizes the importance of companies being able to generate profit without massive scale, especially in markets with limited TAM.
"My wife started a business that does tons of millions in top line with $0 of outside investment."
Sam Lessin shares a personal example of a successful business that did not rely on venture capital, emphasizing that not all businesses require significant funding to grow.
"The key here is, and I think it's something that needs to be relearned in the venture industry. Companies need to learn to make money at low levels of scale."
Frank Rotman reiterates the need for the venture industry to focus on companies that can be profitable without requiring large amounts of capital or scale.
"The operative question is how much can you learn for how much money, how quickly?"
Frank Rotman discusses the importance of efficiently gaining knowledge about a business's potential with minimal investment.
"Seed investing is about derisking the one two key bets, which then unlock a series A."
Sam Lessin explains that seed investing traditionally aimed to validate key assumptions, paving the way for larger investments, but this approach may change.
"I made 1000 x on our Salana seed."
Sam Lessin shares a personal success story, highlighting the potential for high returns from seed investments.
"You only get so many bullets in the gun."
Sam Lessin metaphorically describes the limited opportunities investors have to make successful seed investments, emphasizing the importance of careful selection.
"Does building a 100, 200, 300 million dollar company really give up the option value of building the ten or 20 or $50 billion company?"
Sam Lessin questions the trade-off between building a moderately successful company and aiming for a much larger one, suggesting that starting with a solid foundation does not preclude larger success.
"I don't think great companies are just manufactured. Great companies are built on top of good companies."
Frank Rotman asserts that successful companies are developed through stages, starting with a good business before achieving greatness.
"shockingly, there's a lot of nominally or even some known public companies that are tech exits. They're not even close to that."
The quote expresses surprise at the number of companies that are considered tech exits despite not truly being so, implying a misallocation of capital.
"I don't think there's respect for capital."
This quote reflects a belief that the current generation of founders may not value or utilize capital as judiciously as previous ones.
"I actually am very optimistic that there's going to be a whole generation of people like, oh, shit, it is a much better life to own 80% of a business that has 50 million top line than own 10% of a business that does 500."
The quote conveys the speaker's belief that entrepreneurs will start to prefer having greater ownership in smaller companies over less ownership in larger ones.
"Is SaaS a good place to be investing anymore?"
This question challenges the current investment viability of the SaaS sector, suggesting that it may no longer be as promising as it once was.
"So if you're generating proof, that's a good time to examine whether capital actually would be an accelerant."
The quote suggests that capital should be invested in businesses that are already demonstrating success, rather than trying to force growth in less promising ventures.
"The YC thing in particular was, if we're talking about venture capital, the factory that was like ground zero for the construction of the factory."
This quote criticizes Y Combinator and similar accelerators for producing startups that may lack individuality and are too formulaic.
"But I think that's more about the capital side in my mind than it is the factory part."
The speaker is distinguishing between the process of raising capital and the systematic approach of accelerators, suggesting that the former is more important to them.
"I think that all venture firms have failed with their talent arms."
The quote criticizes venture capital firms for not effectively supporting their portfolio companies in critical areas like talent acquisition.
"I've never successfully hired sales. I think sales is incredibly hard to hire at startups specifically because the whole nature of sales is like, the people who want to go early are anti correlated with the good people."
This quote highlights the difficulty of hiring effective salespeople for startups due to the contrasting nature of typical sales motivations and the conditions present in early-stage companies.
"Jason bet me that he thought there would be an IPO a week. I think it was from the back half of next year. So 2024 H2."
Harry Stebbings summarizes the bet made by Jason Lemkin about the frequency of IPOs in the latter half of 2024.
"Public markets are up 30%. Every public company is more efficient, even me. I have five investments I've made, north of 200 million in revenue growing 30% or faster that are now efficient."
Jason Lemkin expresses optimism about the current state of public markets and the readiness of certain companies for IPOs.
"No one gives a shit about a company that does 200 million in top line and grows at 30% margins. No one cares."
Sam Lessin provides a provocative stance on the perceived value of smaller companies in the eyes of investors, suggesting a lack of interest compared to larger entities.
"There is absolutely an LP pullback, and it's very real and material."
Sam Lessin discusses the current trend of LPs becoming more cautious and strategic in their venture capital investments.
"If Jason is right with the IPOs, then money will flow back into the LP ecosystem once the IPO window opens up, and that might reverse course."
Frank Rotman suggests that a resurgence of IPOs could revitalize venture capital funding, affecting LPs' investment strategies.
"I think narrative is going to stop at the seed when it used to flow through to the series A and even into the series B."
Frank Rotman predicts a shift in venture funding where compelling stories will no longer suffice beyond early-stage investments.
"I am very excited to fund a bunch of companies at five and under in weird things that are coming to you because no one else will give them money."
Sam Lessin shares his enthusiasm for funding unique startups that may be overlooked by other investors, emphasizing profitability and strategic value.
"I would like to be able to magically buy at least 10% of any seed company I meet that I want to invest in."
Jason Lemkin expresses a wish to secure larger ownership percentages in seed-stage companies, which he believes is critical for successful investing.