There is so many VC content out there, on Twitter, on Medium, on blog posts, and so much of it really is transparent and helpful. The industry is so much less opaque than it was just a few years ago.
But it’s also sort of confusing, how much of it there is.
And in particular what’s confusing is: What Do VCs Really Want?
Here’s the simple answer:
What VCs are Hoping For, a simple guide:
Seed-Series A: 100x Series B-Series C: 10x Pre-IPO: 3x
So that's sort of what you are promising you will go for
— Jason BeKind Lemkin (@jasonlk) January 12, 2021
One of the most tiring things for founders can be always being compared to Unicorns and now Decacorns. Certainly sometimes it’s inspirational. I loved it when many of the founders come out of each SaaStrAnnual saying they needed to grow faster:
But the reality is as a founder there are different ways to make real money and build something meaningful. Go back to our case study of Marketo vs. Eloqua vs. Pardot here.
For VCs that manage a fund any bigger than $150m or so though (which is relatively small for a VC) — there really is only one way. Unicorns.
If you understand this, at least you’ll understand why VCs are the way they are.
Because the (maybe semi-sad) thing for VCs is, only Unicorns make the business model work:
Say you have a $200m VC fund (not that large, but basically our current fund, as an example).
There’s an exercise BigCos do, that I was asked to do, that at first, I thought was a waste of time. The exercise is: “How would you run your business if short-term revenues didn’t matter?”
I thought (and still think) in that context it was a bit of a trick question. First, of course revenues matter, in the end, they (and profits) are all that matter, and in SaaS, you need short-term revenue to beget long-term revenue. Second, I couldn’t imagine a world where it was a better idea to run a B2B business without regards to revenue, even in a F500 tech company, even if you could nominally “grow” faster.
But since then, I’ve turned this around into an exercise that I think is one of the best planning exercises you can do for a post-traction SaaS start-up company.
The question, and exercise is, “What would you do, Continue reading "Imagine a World With Unlimited Capital, and See Where It Takes You"
Q: I run a bootstrapped software company and our biggest customer (60% of our revenue) has offered on several occasions to invest in the company. I worry allowing customers to become shareholders could complicate things. Should we consider this?
Taking an investment from your largest customer certainly will complicate things. So you should be worried. But there are positives as well.
If the ownership stake is > 5%, could scare away VCs. Less than this though, no one will care too much.
If the ownership stake is > 10% or so, could scare away acquirers.They may be worried you are an affiliate of the BigCo and not a practical acquisition target. A > 10% shareholder can in many cases, one way or another, block an acquisition.
Q: Why are so many VCs moving to Miami and Austin?
It’s taxes first — but this isn’t new, and while taxes in CA are even higher than a few years ago, they’ve always been high … and
Quality-of-life second. QOL has declined dramatically during Covid in San Francisco. This is new.
And third — investing over Zoom is now routine. This is the real new part. Before Covid, it was rare for all but angel checks to happen without a face-to-face meeting. This is the true disruption that has pushed VCs over the edge to finally … move. When before, taxes and even QOL alone weren’t quite enough to make the move.
CA’s state income taxes and more importantly, its state capital gains taxes (taxes on investments) are the highest in the nation at 13.3%. Even New York doesn’t come
In both my start-ups, I was constantly worried about losing all my investors’ money. The first time, my first start-up which we haven’t talked much about, NanoGram Devices, I mainly worried about it because I realized we’d almost never have enough capital to achieve our long-term goals. So, FBOW, we sold for $50,000,000 after 12.5 months.
At Adobe Sign / EchoSign, it was a bit different. My investors included my old bosses, and, as time went on, myself to a material extent. When things were rough in our first 12 months, one of the main reasons I didn’t quit was because I couldn’t bear to lose their money. So that was good, in the end, that fear of losing your investors’ money. At the time, at least. It got us to our “Series B” (what would be called an early Series A today and ultimately a pretty good
Q: What are the main responsibilities of an average venture capitalist?
Let’s break it down a bit.
General Partners at VC firms have to:
Raise capital. Yes, VCs themselves have to raise the money they invest. If you are top tier firm, with a long track record, this often can be done easily. If you aren’t though, it can take years. And so this can consume anywhere from 5%-50% of your time.
Manage their LPs. This doesn’t take a massive amount of time, but it does take time. VCs have to manage their own investors, the “LPs” or Limited Partners. This includes an Annual Meeting (which can take a lot of prep), quarterly reporting, audits, and more. This is probably 5% of your time.
What is the minimum projected annual revenue in the exit year and projected exit valuation for a startup to be investable from a VC?
For most “traditional” U.S. VCs doing early-stage investment, the goal is simple:
At least 1 investment out of every 20 or so per fund needs to be worth $1 Billion or more within 10–15 years.
If that happens, the math generally works out. If there is more than 1 “Unicorn” per fund (i.e., per every 15–30 investments), even better. If there is a “Decacorn” (i.e., worth $10 Billion+), then the fund makes a lot of money.
So VCs are thinking that when they meet you. Is there a 5-10% chance this investment might be worth $1B+? Or more subjectively, is there a real chance, given the team, the market, and the very early traction?
You can also watch the video or read the transcript below.
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Jason Lemkin SaaStr Sunil DhaliwalTranscript:Jason Lemkin:Hey everybody at SaaStr. I wanted to have another fun, informal conversation with, one of, I think, the most insightful and smartest cloud investors, Sunil Dhaliwal. GP and founder of Amplify Partners. Interesting for a couple reasons, but Sunil’s been investing in cloud internet since before almost anybody. You’ve spent almost Continue reading "SaaStr Podcast #394 with Sunil Dhaliwal and Jason Lemkin"
Woah. What’s going on?
It’s pretty simple. The “growth premium” in SaaS has never been higher. Slow growth like Workfront, even at $200m ARR, is “only” worth 7x ARR. A strategic acquisition like Llamasoft is worth 15x. And as we’ll see below, those prices might actually be pretty high, because acquisitions often come at a premium. Both might be worth less on the public markets.
And Hopin, a digital events company that hit $20m in its first