May 27, 2024 · 1h 24m · news
Jason Lemkin: Why Pricing is Worse Than Ever and There is More Funding Than Ever | E1157 · 20VC with Harry Stebbings
0:00 / 0:00
▶ Watch on YouTube →
gold bands on the timeline = statements, start to end. Hover to read, click to jump. CC turns on captions
In this comprehensive interview, SaaStr founder Jason Lemkin joins Harry Stebbings to dissect modern venture capital dynamics, sharing critical lessons on early-stage due diligence, fund mathematics, founder commitment, and the changing landscape of SaaS valuations and private equity.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Harry holds 11.1% of the talking time here. How this is scored →
Harry as informed peer 4.8 Guest teaching 5.7 Guest disagreement 2.4 Harry pushing back 3.0
speaking balance: gold is Harry, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 19:28 Jason rejects Harry's anti-competition stance
When Harry states he hates investing in competitive markets, Jason directly reframes competition as a positive for hyper-agile teams and warns that running from crowded markets misses iconic outliers.
Hardest push from Harry ▶ 26:10 Harry forcefully questions PE buyout returnsHarry aggressively pushes back on PE acquisitions of Pipedrive and Zendesk, arguing that high customer decay and lack of innovation make it impossible for PE firms to make money.
Biggest teaching moment ▶ 12:59 Jason breaks down seed dilution and venture return realitiesJason educates Harry on realistic 50 percent seed dilution down to IPO and explains why fund managers must target multi-billion dollar exits to generate meaningful carry.
Harry holds his own ▶ 54:51 Harry presents live portfolio churn metricsHarry demonstrates deep operational familiarity by citing real-time data from an active deal where monthly churn jumped from 2.6 percent to 5.6 percent, driving the conversation on SMB volatility.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Harry as informed peer | Guest teaching | Guest disagreement | Harry pushing back | Why |
|---|---|---|---|---|---|---|
| Welcome and "Funny VC" Show Format | 2 | 1 | 1 | 1 | Warm opening and introduction of the 'Funny VC' review format. Lemkin outlines his top exits by cash versus NAV, while Stebbings facilitates the conversational setup. | |
| Lessons from SalesLoft: Commitment and Binary Teams | 3 | 5 | 2 | 1 | Lemkin shares core learnings from SalesLoft regarding extreme founder commitment and binary co-founder pairs. Stebbings agrees with the difficulty of venture returns. | |
| Modern Due Diligence: Screening the CTO Early | 4 | 6 | 1 | 2 | Lemkin explains his shift to screening CTOs early in the diligence process. Stebbings asks tactical questions about how to extract CTO insights in short meetings. | |
| CEO vs. CTO Dynamics and the Reality of Dilution | 4 | 7 | 2 | 2 | Lemkin breaks down the math of 50% seed dilution on the path to IPO and the difficulty of driving fund returns. Stebbings asks whether Lemkin would still invest if the CTO is weak. | |
| Benchmarking World-Class CTOs and the Minimalist Management Rule | 5 | 6 | 2 | 2 | Stebbings mentions interviewing 15 customer references in a day while Lemkin explains software performance red flags at $1M ARR. Lemkin advises asking Columbo-style open questions. | |
| Embracing Competition: Why Great Founders Win in Crowded Markets | 5 | 6 | 4 | 5 | Stebbings directly states his hatred for investing in competitive markets. Lemkin counters forcefully, arguing that avoiding competition causes VCs to miss outliers like Datadog and Rippling. | |
| Case Study: Pipedrive, HubSpot, and Exiting When Founders Leave | 4 | 6 | 3 | 2 | Lemkin reviews Pipedrive's exit to Vista and outlines his strict rule to exit positions when founders step down. Stebbings emphatically supports selling when founders depart. | |
| PE Bubble Deals, LP Mulligans, and Knowing When to Sell | 6 | 5 | 3 | 8 | Stebbings strongly challenges whether private equity buyers will make money on Pipedrive and Zendesk given current decay and churn rates. Lemkin responds by discussing LP mulligans and exit timing. | |
| HubSpot's Multi-Product Success and the 10% Market Share Expansion Rule | 5 | 7 | 2 | 2 | Lemkin presents his rule that crossing 10% market share in a core ICP requires a company to launch a second act. Stebbings asks how to balance core market focus versus founder expansion goals. | |
| Jason's Biggest Losses: Stubborn Founders and Blind Follow-on Checks | 4 | 6 | 2 | 3 | Lemkin reflects on his largest capital loss resulting from writing a third follow-on check with insufficient diligence into misreported financials. Stebbings probes on the mechanics of doubling down. | |
| Anti-Fraud Diligence: Screening for Bullshit with Bank Statements | 5 | 5 | 4 | 6 | Lemkin advocates requesting bank statements early to screen for financial discrepancies. Stebbings pushes back on the friction this creates with founders who might tell investors to bugger off. | |
| Growth Trajectory: The Triple, Triple, Double, Double Metric | 5 | 7 | 2 | 2 | Lemkin reiterates the necessity of the triple, triple, double, double metric for public market trajectory. Stebbings asks specifically what monthly growth and churn rates trigger investor interest. | |
| Outlier Valuations and the Inside Capital Flood | 5 | 6 | 3 | 3 | Lemkin describes how insider capital floods outlier companies, distorting valuations beyond reasonable metrics. Stebbings asks whether taking insider capital ultimately harms or helps portfolio companies. | |
| Structured Rounds and the Fate of "Zombie" Public SaaS Companies | 6 | 6 | 3 | 4 | Stebbings identifies structured rounds and asks what becomes of zombie public SaaS companies like Dropbox and Twilio. Lemkin explains private equity interest and high operating margin cash engines. | |
| The Rule of Retention: Enterprise NRR and the Limits of SMB Churn | 7 | 6 | 2 | 3 | Stebbings shares live data from an active deal pipeline showing churn jump from 2.6% to 5.6%. Lemkin breaks down enterprise NRR requirements versus acceptable SMB churn limits. | |
| Burn Ratios, Efficiency, and the Trap of Enterprise Execs in SMB Models | 4 | 7 | 2 | 2 | Lemkin breaks down the Burn Ratio and warns against placing enterprise executives into SMB SaaS models. Stebbings asks for specific acceptable burn levels for $1M ARR SMB companies. | |
| AI Hype Cycles, Valuation Hubris, and Why Seed Investing Is Broken | 6 | 7 | 4 | 4 | Lemkin argues seed investing is systemically broken due to inflated YC caps and fund sizing math. Stebbings sets valuation boundaries, maintaining he avoids $150M seed pricing. | |
| Learning from RevenueCat Investment | 4 | 5 | 1 | 2 | Lemkin shares learnings from his RevenueCat investment, including misinterpreting GMV as ARR pre-YC. Stebbings asks about entry valuation and ownership dynamics. | |
| Mistakes of 2021, a $5 Million Loss, and End-of-Fund Learnings | 5 | 5 | 2 | 3 | Lemkin discusses a $5M write-off where founders fired their sales team despite $15M in the bank. Stebbings adds that a good deal valuation does not equal a good investment. | |
| Quick-Fire: Underrated SaaS CEOs and the Klaviyo Phenomenon | 6 | 5 | 2 | 2 | During quick-fire, Lemkin highlights ServiceTitan and Klaviyo as underrated powerhouses. Stebbings corrects market cap details live during the exchange. | |
| Private Equity-Owned SaaS and Legacy Companies | 6 | 5 | 3 | 5 | Stebbings delivers a sharp critique of Anaplan, calling it a terrible product getting eaten by Pigment. Lemkin explains what happens when software companies stop innovating. | |
| Venture Fund Allocation Advice and Managing LP Challenges | 5 | 7 | 3 | 2 | Stebbings poses a hypothetical LP fund allocation scenario across Seed, Series A, and Growth. Lemkin advises individuals against fund investing and dissects GP economics. |
Statements from this episode (55)
Lemkin: Same capital chasing fewer startups growing at triple digits
“There's just as much capital chasing fewer and fewer folks that can grow at triple digit rates.”
Lemkin: Top venture investments scale $1M to $10M ARR in 5 quarters
“The best investments go one to ten million in five quarters or less, the very best ones.”
Lemkin: Startups must expand product upon reaching 10% ICP share
“As you approach 10% market share in your core ICP, your core market, you gotta expand.”
Lemkin: Monthly churn over 3-4% invalidates software business model
“If the churn is anything more than three or four percent a month, it's not even software anymore.”
Lemkin: B2B tech saw only two IPOs in 2.5 years
“It's like two IPOs in B to B in two and a half years,”
Lemkin: Zero overlap between top investments by cash vs NAV
“My best by cash and best by NAV are not, there's no overlap yet.”
Lemkin: Salesloft sold for $2.5B in cash at $100M ARR
“Sales off sold for two and a half billion of cash and about a hundred million in ARR.”
Lemkin Will Never Invest Without Two Deeply Committed Co-Founders
“Finding what I will never sacrifice again is two great co-founders. Two great co-founders, and not great numbers are great, but insane level commitment.”
Lemkin Shifts CTO Due Diligence Call to Second Meeting
“In the old days, I would do it late in the process. I would get to know the CO would talk to the customers, right? I would go deep and then at the very end, I'd be like, okay, I gotta talk to your CTO Harry to make sure that this is real. Now I immediately ski…”
Lemkin: Great CTOs Instantly Identify Their Product's Weaknesses
“Asking the CTO what they, what frustrates them and their product is very telling. The great CTOs will answer in 60 seconds.”
Lemkin: Seed CEOs are better than CTOs 80% of the time
“Overall, I would say, 80% of the time, the CEO is better than the CTO, especially at the seed or early seed stage”
Lemkin: Seed investments face 50% dilution before IPO
“Really in today's world, you're going to suffer 50% dilution on the way to IPO. That core seed fund that you struggled to get 12% of, you know, it could be six by the IPO.”
Lemkin: First five investments all reached billion-dollar valuations
“Even though my first five investments all worth a billion or more for real, real billions”
Lemkin: Seed investors should only evaluate CEO and CTO quality
“If I'm invested in someone with 10 employees or less, I don't care anymore what the management is, but I do care what the CTO is the one I care about.”
Lemkin: Software quality issues at $1M ARR get worse by $10M ARR
“When I see these signs that the software isn't good at a million, it rarely gets better at 10. It gets worse. The load goes up. The workflows go up.”
Lemkin: Passing on Great Founders Over Competition Misses Out on Category Winners
“I believe the best opportunities find you at the end of the day. It's not that you don't find them. Okay. But they also find you by the same token. And if you're gonna pass on an amazing binary set of founders, an amazing CEO, CTO, just because they're in a co…”
Lemkin: Competitors Net Positive for Startups with Superior Product Teams
“If you have the best engineering product team in the industry having a lot of competitors is a positive because they help grow a large market and you keep each quarter you pull away each quarter you pull away, right? Each quarter you pull away and it becomes a…”
Lemkin: Five decision-making co-founders is too many for a startup
“Five co-founders is too many is one learning. Now you can have 12, but I think five making decisions is too many.”
Lemkin: HubSpot CRM generates $700M ARR and outgrows marketing automation
“CRM is at seven hundred million, I think, and it's growing faster than marketing automation.”
Lemkin Will Liquidate Positions as Soon as Founders Depart
“For now, for me, right or wrong, if the founders leave, I will liquidate my position as soon as it's significant, right?”
Lemkin: Private Equity Firms Will Lose Money on Bubble-Era Software Buyouts
“Yeah. I think they'll lose money on, on, on these deals.”
Lemkin: LPs Are Giving VCs Mulligans on 2021 Funds to Focus on AI Deals
“Everyone's getting a mulligan. Everyone is getting, the LPs have decided they just, there's no point in being a critic for your, A hundred X deals in 20, 21. We're gonna more be a critic for your hundred X AI deals in 20, 24, but the 20, 21 deals are behind us…”
Lemkin: Slack Would Be Worth $12B Today Despite Doubling Revenue
“What would Slack be worth today at two billion in revenue? Maybe it would be worth twelve billion, right? At twice the revenue.”
Lemkin: VCs Should Always Support Founders When They Decide to Sell
“If the founders say to sell, sell.”
Lemkin: A huge percentage of Datadog customers buy eight products
“That's what Olivier has done at Datadog decimated multiple categories because it's a founder-led company, and he comes in and says, we're gonna own these categories. We're gonna keep owning a product after a product. No, they don't win in everything, but that'…”
Lemkin: VCs Conduct Zero Diligence on Follow-On Investments
“There's zero diligence for these checks. None for these follow on checks, right? As long as the top line looks good, no one ever checks anything below the top line. There's no diligence, no customer calls, no nothing, right?”
Lemkin: You can build a unicorn bullshitting, but the best founders don't
“I think you can build a unicorn bullshitting, but I don't think the best founders bullshit.”
Lemkin: Lost $5 million on startup that improperly recognized annual revenue upfront
“This five million dollar loss when you take 12 months of revenue and you recognize it all in one month, that's at the edge of fraud, isn't it?”
Lemkin: Customer calls should only confirm VC conviction, not fix marginal deals
“I'm not looking for a customer call To turn a frown upside down. I'm not looking at to take a marginal investment. This is, I think what VCs used to do in the old days is they'd hope, right? I'm looking only for confirmation with customers.”
Lemkin: IPO markets evaluate efficiency at listing, ignoring capital raised history
“The IPO markets don't care. They actually don't care whether you raise nothing right in primary like Atlassian or whether you raised a crap load like rubric. Or whether you raised almost nothing like Klaviyo and then a bunch and then all, and then burn nothing…”
Lemkin: Inside VC Funds Are Flooding High-Growth Portfolio Companies With Unprecedented Capital
“Anyone in my portfolio that is growing quickly, the insiders flood it with capital, flood it with flood it with capital in a way I've never seen in my whole career flood. Everyone used to be a risk averse and then they wanted tiger to do it and they wanted sof…”
Lemkin: Startups Flooded With Insider VC Capital Is a Net Negative
“No, it's a complete negative. It's a, because they do less work, and they have a different bar, right? Because if you're managing ten billion, and you've got a five million dollar stake, or ten million dollars, and that company is just, it's just in the top de…”
Jason Lemkin: Low-growth SaaS 'zombies' like Dropbox near 40% margins
“You talk about zombies, but some of these zombies are approaching 40% operating margins, and look, it's not fun, I don't think it's fun to be running Dropbox today, ok, I don't think it's fun, I don't think it's anything like when Drew started, but they're app…”
Jason Lemkin: Current SaaS downturn is in year 3 versus 2016's one-year slump
“If you're in a segment of SaaS that's in a downturn, we're going into the third year. 2016 was one year. This is three years, so it's tough.”
Lemkin Has Never Seen an Enterprise SaaS Company at $1M ARR Below 100% NRR
“I've never not seen triple digit NRR at that scale. I've never not seen it, never in my career. My own experience as a founder or any company I've invested in, it's always triple digits in the enterprise.”
Lemkin Passes on 100% of SaaS Startups with Abnormally High Churn
“I have passed on every single company that had For their segment, abnormally high churn, a hundred percent.”
Lemkin: Averaging Prior Four Months' Growth Predicts the Next 8-9 Months
“I find if you take the last four months of growth and average it, that's going to be your growth the next eight to nine months.”
Lemkin: RevenueCat hosts 10,000 consumer SaaS clients with 60% annual churn
“They have 10,000, you know, consumer SaaS companies on their platform, right? I think that it's, they have a 60% annual churn rate.”
Lemkin: Enterprise executives cannot successfully run SMB software business models
“You can't put enterprise or mid-market people into these S&P models. Just the toolkit, the type of people they hire, the way they spend in marketing, the customer lifetime, none of their metric, it just doesn't work.”
Lemkin: ServiceNow achieves a 99% Gross Retention Rate over three years
“At ServiceNow, the GRR is 99. They keep 99% of their customers over three years.”
Lemkin: VCs will regret low ownership stakes over the next decade
“I think the other hubris that a whole generation of folks on 20 VC and otherwise are, we're all gonna slowly regret over the next decade. And it's tough one to solve is just these low ownership stakes.”
Lemkin: YC's batch fundraising model only works for Y Combinator
“They have a very effective, it's just, it only works for them. It doesn't work for anybody else. It doesn't even work for EF or certainly anybody else. It only works for them.”
Lemkin Confused RevenueCat's GMV With ARR When Investing
“I misunderstood. I confused their, basically their GMV with their ARR. I got it wrong. So I thought they were doing like 10,000 dollars a month in MRR, but they were doing managing 10,000 dollars a month in subscriptions and making like 30 dollars.”
Lemkin: RevenueCat Powers Subscriptions on 30% of US Mobile Devices
“So the revenue cat is on 30% of all mobile us mobile devices managing subscriptions, and so that they've crushed.”
Lemkin attributes all VC losses to founders lacking multi-decade commitment
“Those are the investments where I just don't think you can lose, and when I've, my losses, to tie this all into the theme, my losses are when the founders weren't that way.”
Jason Lemkin Lost $5M on Startup That Fired Sales Team with $15M Banked
“And then this five million dollar company, one day they came into work and they fired their entire sales and marketing team. With fifteen million dollars in the bank, they fired everyone, just like Elon, but Elon's a better founder, fired a supercharger team. …”
Jason Lemkin Pledges Never to Treat End-of-Fund Deals Differently Again
“So this was an end of fund thinking, and I will never approach an end of fund investment treating it any differently than the start of fund investment. I will never do that again.”
Lemkin Regrets Distributing $100M Exit Instead of Recycling Into Seed Fund
“I should have recycled all that money instead of distribute it. It was impactful to a seed fund, right? Cause it was a significant return. But it was so, it was early in the life cycle of the fund. And now I wish I had those tens of millions to put into the po…”
Lemkin predicts Klaviyo will surpass HubSpot in marketing revenue soon
“They will be soon be doing more marketing revenue than HubSpot.”
Lemkin predicts Klaviyo will surpass Shopify in SaaS revenue in years
“They will cross, they will be doing more SaaS revenue than Shopify in a couple years.”
Lemkin: Almost every SaaS company in venture markets is overpriced
“This is why almost every SaaS company is overpriced in the venture markets because of Klaviyo. If Klaviyo was worth twenty billion, then all these deals we're doing make sense.”
Lemkin: Most venture capital funds generate single-digit annualized returns
“15% a year is better than most VC funds make. They're in the single digits.”
Lemkin: Individual Investors Should Avoid Venture Capital Funds for Index Funds
“My advice to everyone out there that, like, emails me, hey, can I invest in Sastra Fund? Don't put money into any of them, is my advice to individuals. To individuals because I don't even think everyone's full of shit. I think even making three, if you do a se…”