Sep 20, 2023 · 1h 24m · news
Is the VC Model Broken? Jason Lemkin, Mike Maples, Eric Paley & Harry Stebbings Debate | E1062 · 20VC with Harry Stebbings
Eric Paley · 39m spoken Mike Maples · 21m spoken Jason Lemkin · 11m spoken Harry Stebbings · 6m spoken
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Prominent venture capitalists Jason Lemkin, Mike Maples, and Eric Paley join host Harry Stebbings to debate whether the traditional seed model is broken, detailing the dangers of AI overvaluation, the misalignment of venture incentives, and the critical importance of disciplined, non-consensus investing.
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 8.3% of the talking time here. How this is scored →
Harry as informed peer 4.0 Guest teaching 3.4 Guest disagreement 3.0 Harry pushing back 3.5
speaking balance: gold is Harry, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 45:39 Jason challenges Eric on executive talent dynamics
Jason forcefully rejects Eric's premise that executives avoid overvalued startups, citing first-hand candidate interviews where top hires explicitly chase unicorn status symbols.
Hardest push from Harry ▶ 1:05:34 Harry pushes Eric on Stripe's potential down-round IPOHarry directly challenges Eric's anti-public market stance by constructing a concrete valuation comparison between Stripe and Adyen at a $15B-$20B public price.
Biggest teaching moment ▶ 32:49 Mike lays out seed ownership cap table mathMike educates the panel on fund economics by contrasting buying 13.6% of Lyft for $750k at $5.5M post against the $2.7M-$4M+ cash requirements at $20M-$30M seed prices.
Harry holds his own ▶ 8:11 Harry challenges Mike with Character.ai capital demandsHarry uses concrete data points, citing Character.ai's $2M single-model training cost, to dispute Mike's claim that non-consensus traditional seed structures apply universally.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Harry as informed peer | Guest teaching | Guest disagreement | Harry pushing back | Why |
|---|---|---|---|---|---|---|
| Is the Boutique Seed Model Dead? | 4 | 3 | 3 | 4 | Harry opens the discussion on whether boutique seed funds are dead in an era of $30M YC valuations, citing previous podcast conversations. Mike gently corrects macro generalizations by walking through power-law seed math and the definition of non-consensus deals. | |
| Demystifying VC Hype: The 20-Year Theme Myth | 6 | 4 | 3 | 6 | Harry pushes back on Mike's thesis by citing Character.ai's $2M model training cost to argue that capital requirements in AI don't fit traditional seed fund structures. Mike reframes Character.ai as a high-priced consensus deal rather than a true non-consensus seed bet. | |
| The AI Hype Bubble and the Cost of Overvaluation | 5 | 3 | 2 | 3 | Harry references his own LP letter stating seed AI is the worst place to invest right now. Jason cites top B2B VCs allocating 80% to AI, while Eric rates the current AI valuation landscape an 8 or 9 out of 10 bubble. | |
| Defining True Product-Market Fit: Lean vs. Resource-Heavy | 5 | 5 | 3 | 5 | Harry introduces the distinction between product-market fit and business model fit, bringing up WeWork and Allbirds as examples. Mike responds with a strict interpretation of product-market fit, arguing true PMF inherently solves business model questions. | |
| The Myth of Blitzscaling and Board Pressure to Burn | 2 | 2 | 3 | 1 | The guests engage in a peer debate on how blitzscaling and lean startup methodologies are routinely misapplied by founders and board members. Harry stays largely passive as Eric and Mike discuss Uber, Lyft, and Okta. | |
| Market Dominance and the Broken Portfolio Math of High Seed Prices | 4 | 4 | 3 | 3 | Harry asks how critical market dominance is to enterprise value outcomes. Mike demonstrates the explicit portfolio risk math of buying 13.6% of Lyft at $5.5M post versus paying $20M-$30M post for seed stage companies. | |
| Series A Inflexion and the Truth About Outlier Pricing | 6 | 5 | 4 | 5 | Harry asserts a strong thesis that Series A is currently more attractive than Seed due to lower price inflections on de-risked ARR. Jason forcefully challenges the panel, arguing that venture is an outlier business where pricing rules matter far less than picking winners. | |
| Deconstructing VC Ownership Targets and Price Discipline | 5 | 5 | 3 | 5 | Harry admits his own portfolio compromises on low ownership at high valuations and asks the guests if they maintain discipline. Eric reframes target ownership as a toxic mindset that aligns poorly with founder success. | |
| Next-Round Risk and the Psychology of Valuation | 1 | 2 | 2 | 1 | The guests discuss founder psychology regarding next-round valuation risks and how vanity metrics replace prudent planning. Harry sits back as Jason notes founders will take at most a 20% valuation discount for top-tier VCs. | |
| Talent Realities and the Unicorn Valuation Shift | 1 | 2 | 5 | 0 | A guest-driven clash occurs when Jason directly pushes back on Eric's claim that talent avoids overvalued companies, citing interviews with 15 head-of-sales candidates who aggressively seek out hot unicorn badges. | |
| The Low-ARR Unicorn Conundrum and Mulligan Funds | 6 | 4 | 3 | 5 | Harry discloses his own fund once backed a $500k ARR business at $750M valuation and asks what becomes of the thousand low-ARR unicorns. Jason introduces the concept of 'mulligan funds' while Eric outlines three realistic operational outcomes. | |
| The "Quiet Quitting" of Founders and Returning Capital | 1 | 2 | 2 | 0 | Jason and Eric discuss the reality of founders 'quiet quitting' or returning unused capital when overcapitalized companies lose momentum. Harry does not intervene during this monologue exchange. | |
| Disengaged Capital and Board Responsibility | 5 | 5 | 4 | 6 | Harry challenges the panel on whether angels should advise founders to return money early to save firm relationships. Harry then directly presses Jason on his responsibility as a GP to call absent multi-billion-dollar fund board members. | |
| LP Responsibility and Strategy Accountability | 5 | 4 | 3 | 5 | Harry redirects the conversation sharply to LP accountability and asks how LPs should view prior fund vintages. Mike forcefully rejects the idea of 'mulligan funds', arguing that fund managers must take full accountability for rapid deployment cycles. | |
| The Illusion of IPO Windows and Public vs. Private Volatility | 6 | 4 | 3 | 7 | Harry asks what will open the IPO window and directly challenges Eric's anti-public stance by bringing up Stripe's potential $15B-$20B public pricing relative to its $100B private mark. Eric counters that private valuations are arbitrary anchor marks anyway. | |
| Selling Windows and Fund Returns | 1 | 2 | 2 | 0 | Mike explains that 18-month hype cycles are crucial liquidity windows for selling holdings rather than buying. The guests converse uninterrupted by the host. | |
| Declining Multiples and the Broken B2B Model | 5 | 4 | 3 | 5 | Jason worries that 6x B2B public revenue multiples break late-stage venture math. Harry pushes back, asking if 6x multiples are simply a healthy return to historical norms. | |
| Closing Bets: TVPI vs. DPI and Cloud Reacceleration | 4 | 2 | 3 | 2 | Harry solicits predictions and bets from the panel. Eric bets that recent vintages will see the largest TVPI to DPI disconnect in venture history, while Jason bets on enterprise cloud hiring reacceleration. | |
| Micro-Level Bird Spotting vs. Macro Economics | 1 | 3 | 2 | 0 | Mike compares seed investing to spotting rare finches in the Galapagos Islands rather than macro forecasting. Harry listens as Eric notes how forced private illiquidity often boosts long-term returns. | |
| Trade Desk Liquidity and Board Governance | 5 | 3 | 3 | 5 | Harry directly presses Eric on the peak valuation of his Trade Desk position. Eric politely declines to reveal exact dollars while explaining LP distribution sequencing. | |
| Regrets of Early Selling and Final Remarks | 5 | 4 | 3 | 5 | Harry prompts the panel for their biggest holding/selling mistakes. Mike shares his regret of selling Twitter stock early at a $1B valuation, while Eric refuses to criticize founders. |
Statements from this episode (63)
Paley: Startup Execs Should Compare Real Financials Against Valuation Hype
“If you're coming into a company as a senior executive and you have a CEO is bragging to you about how big their last round was in dollars and how big the post money was, ask to see the financials and compare those financials to what they're claiming in the van…”
Paley: High seed valuations make Series A fundraising significantly harder
“I actually think being overpriced at seed is actually a bigger problem than most entrepreneurs realize, particularly as the market's adjusting, right? It's a very hard time To raise Series A in general, and it's a harder time if you're already priced where som…”
Maples: Floodgate Invested $750K in Lyft at $5.5M Post-Money
“And invested 750,000 dollars at 5.5 post in Lyft.”
Maples: $20M-$30M post-money seed rounds generate poor investor returns
“When a seed round is priced at 20 post, 30 post, it's not non-consensus. It's priced to perfection, and it's priced in a way that everybody believes it's gonna succeed, that it's a hot deal. And that's bad for two reasons. It's bad for the investor, Because ev…”
Paley: Top Company Never Matched Its Founding Year's Hottest Theme
“Never, not the last 20 years, has the most valuable company born in any single year, right, valuable as of now, been this in the theme that was hot in that year. It has not happened.”
Paley: The most valuable company founded in 2023 could be direct-to-consumer
“The most valuable company born in 2023 could very well be in direct to consumer Commerce, because that's not where anyone wants to play right now.”
Maples: High-Priced Seed Deals Like Character.ai Won't Return 100x
“Expensive, high-priced investment, and hopefully it works, but you're not going to make a thousand times your money on that deal. You're probably not going to make a hundred times your money, even in the best of circumstances.”
Paley: Most VCs Earn Money From Management Fees, Not Carry
“It's why most VCs get paid on management fees. They don't get paid on, on, on carried interest, because TVPI, TVPI in that case, doesn't actually translate to DPI.”
Lemkin: Craft Ventures Allocating 80% of $3.3B Fund to B2B AI
“David Sachs did an opener with me. He said of crafts, 3.3 billion, they said, 80% is going into B to B AI.”
Paley: AI Startup Valuations Are in an 8 or 9 Out of 10 Bubble
“If you're describing bubble as the asset prices related to that general idea, I think we're in a very extreme bubble. I also want to throw out there, and I think this is very relevant to Oh, yeah, I mean, I think we're not quite at NFT level, but we're probabl…”
Paley: Easy access to early capital usually destroys startup value
“The easy access to money at a accelerated stage that the company is not ready for usually will destroy the company's value.”
Maples: Zenefits Was YC's Only Startup With PMF That Failed
“The only one he could name was Zenefits, and they broke the law.”
Maples: Excess Startup Resources Allow Founders to Pursue Losing Ideas
“And to get product market fit, there's an advantage in being lean, and there's an advantage in having N minus one resources rather than N plus one, because, like, having too many resources lets you pursue losing ideas for too long.”
Paley: Overcapitalization Is the Biggest Risk to Startups Beside Lacking PMF
“Besides product market fit, the biggest risk to a venture-backed company is bad capitalization. And we don't mean undercapitalization. We mean overcapitalization”
Paley: Conventional VC advice urging startups to go faster is dangerous
“Frankly, I think the advice is dangerous, and I'd go one step further, which is, it has become the conventional wisdom of the industry. Which is go faster.”
Paley: Blitzscaling is applied incorrectly in almost every startup context
“I think blitzscaling is this beautiful, beautiful idea of exactly what Mike said applied wrong in all, almost every context, right?”
Maples: Blitzscaling is an edge case for rare market conditions
“It's really not. It's an edge case for a very rare condition where it's clear that the market is pulling these features out of the market massively quickly, and somebody has to fulfill that demand the first.”
Paley: Trade Desk Founder Limited Fundraising to Preserve Acquisition Optionality
“And I'll tell you another story, you know, with Trade Desk, one of the reasons we didn't raise a lot of money was, we were the last ones in, and people just thought it was played already in the programmatic advertising market. But one of the reasons we didn't …”
Lemkin: Investing at $30M seed valuations requires a 50% hit rate
“Half of mine, at least half have to be winners, real winners, at least half. That's the insane, to make that, I'll do the 30 post, right, the 20 post, I'll do it, but I have to believe there that with a relatively high degree of certainty, it will be successfu…”
Paley: High seed valuations lower a startup's chances of ultimate success
“So I just think there's another problem outside of, it's a different form of risk, which is the likelihood of success, in my opinion, goes way down for those companies, which is super counterintuitive because you're like, well, but they have more money at a hi…”
Stebbings: Series A currently offers better risk-adjusted value than seed
“I think that's why Series A is actually the most attractive place to be investing right now, because actually many of them have been significantly de-risked, but because of the markets today, the price inflection is actually significantly lower and less than i…”
Maples: Venture outliers usually start at low seed valuations
“I believe that the outliers usually start out at a low price, because they're outliers. Because they're non-consensus and right. People tend to believe that the world is divided between low price deals with low upside and high price deals with high upside. I d…”
Stebbings: Sacrificed price discipline to invest in top founders
“I haven't stuck to that discipline always. A lot of my portfolio is a lot lower ownership at a lot higher prices. I was like, I either deploy or I don't into good founders.”
Paley: VC obsession with ownership targets hurts founder alignment and returns
“We do not focus on ownership. We actually think that's a very problematic mindset. There's a whole bunch of downstream issues, including, first of all, our missions about alignment with the founder, and the whole ownership mentality. You can twist yourself in …”
Paley: High valuations turn off good investors and increase next-round risk
“I don't think the founders often appreciate two things is how much they're turning off investors that might've been good investors for them, but even bigger, how much risk they're actually taking on their next round. What this round does in terms of creating r…”
Lemkin: Founders lost perspective on next-round risk as VC gamified
“I don't think, I think founders have lost all perspective on the risk they're taking in the next round. Venture has been so gamified the last five years, and everyone's to blame.”
Lemkin: Great founders accept max 20% valuation discount for preferred investors
“I think a great founder will take a 20%, will take a 20% lower or delta term sheet to work with a high, someone they really want to work with. Beyond 20, I think it may be mythical.”
Paley: Many unicorn startups will lose their unicorn valuations
“So I think this, some of this stuff is starting to shift a little bit, largely because so many of these unicorns are going to be, you know, un, unhorned, or whatever the right term is, unwinged, unhorned.”
Lemkin: First-time sales leaders still prefer joining highly valued decacorns
“I'll tell you, I've interviewed 10 or 15 up and coming first time head of sales recently. Okay? All out of Decacorns and Unicorns with good outcomes. Every single kid wanted to join whatever a Heptacorn or Penta, Penta Decacorn. There was no one, no kid, and I…”
Lemkin: VP Candidates Frequently Do Not Know Their Startup's Operational Metrics
“I can't tell you how many VPs I interview all the time from my own portfolio companies, like ethical founders. And I asked them, well, what do you think of the metrics? They don't know them.”
Stebbings: First Fund Had Startup Valued at $750M on $500K ARR
“I had over a thousand X ARR in my first fund. 500 K ARR, seven fifty million pre by one of the best growth funds.”
Lemkin: Recent VC vintages will produce many 'mulligan funds'
“Maybe that's not true today, but I think there's gonna be a lot of mulligan funds out there.”
Eric Paley: Overvalued unicorns face one of three realistic fates
“One of three things are going to happen to those companies, right? They're either going to take the extraordinary amount of cash they got, cut their burn rates down and figure out how to build real companies. And by the way, many of those will still never rais…”
Paley: Investors won't recapitalize overvalued startups with low revenue
“If you're recapping a hundred million dollar revenue company at a billion dollar valuation, but it really should be recapped. People will do that work, but if you're recapping a three million dollar run rate revenue company with a billion dollar valuation, the…”
Lemkin: Many unicorn founders will quiet quit under crushing valuations
“I, I'm, I think a lot of them will quiet quit. Like, I raised three hundred million and a billion. I can't see it, Eric. Like, I could see, great, there's a two hundred million dollar exit, and yeah, I'll get a carve out, and I'll make some money, but I can't …”
Paley: Struggling founders should return unspent capital to investors
“I actually think that if you want to maintain your integrity, you want to maintain your integrity, and you don't have product market fit, and you raise money at a crazy valuation, and you don't want to have this burden on your back for possibly years, and by t…”
Paley: VCs who block founders from selling their companies are nuts
“It's like when a founder wants to sell their company, you say, yes, you should probably sell your company. VCs standing in the way are, I think are nuts.”
Lemkin: Stuart Butterfield Offered to Return His Series A Capital
“I offered to give money back as a founder, right, for my Series A when I wasn't sure. They said keep it, right? Stuart Butterfield offered to give his back.”
Paley: Big VC firms are disengaged and barely care about portfolio companies
“I think the truth of the big firms is they barely care. ... I think it is completely, in most cases, quite disengaged capital.”
Lemkin: Multi-Billion Fund Refused 28 Board Meeting Requests for Top Startup
“I have one of my top investments right now, like, I mean, there's a few asterisks and downgrades, but there's nothing not to love, ok? Double digits in ARR, growing triple digits, A very multi-billion dollar fund led the pre-seed, right? Owns 15% of the compan…”
Paley: Almost all top Founder Collective companies had previously unsuccessful founders
“Almost every one of our best companies, almost every single one, the founder founded something before that wasn't a success or a big success.”
Maples: VCs' 2021 fund failures stemmed from fast 18-month deployment
“And so, you know, I think that part of why people want mulligans on their twenty-twenty-one funds is they were investing their funds in an eighteen-month cycle. And, you know, what they should have been doing is investing in a five-year cycle because the, ever…”
Paley: 2021 Was an Incredible Time to Sell Venture Investments
“2021 was an incredible time to be a seller, and anyone who didn't see that was completely playing momentum.”
Paley: The SPAC craze was largely a waste of energy for unready companies
“I think the SPAC craze was just a waste of everyone's energy and a bad idea, and I'm not saying there weren't any good SPACs, but generally speaking, it was a path, generally, there were exceptions, but it was a path for companies that were not ready to be pub…”
Paley: Truly strong companies can go public in almost any market environment
“I think if you're a strong company, you can go public in almost any period of time, as long as the market volatility is not insane, like the great financial crisis. If you are strong, if you're really ready, you probably can go out in almost any environment, r…”
Paley: Private companies are actually more volatile than public companies
“Private companies are more volatile than public companies, in truth, we, like, pretend they're not at all volatile, and somehow their valuations are whatever happened in the last round some months ago.”
Maples: Floodgate monetized Lyft and Okta holdings prior to 2020 peak
“As much as we loved Lyft and Okta, you know, in those years leading up into twenty-twenty, we're like, okay, we need to monetize these things, right, because there's a lot of excitement about tech stocks right now, and these prices are really high, and it does…”
Maples: Tech companies will be valued on fundamentals for 10-15 years
“It may not happen again for another 10, 15 years. The next 1015 years, it's, companies I think are going to be much more valued on fundamentals and what they're really worth, but there are these windows, usually they last about 18 months, where the difference …”
Paley: Inflated IPO valuations cause long-term destruction to company culture
“I actually think the IPO inflation of those periods really has long-term detrimental effects. It's very hard to work for a company that went public at ten billion, that today is worth one and a half billion very hard that's right very hard destroying for the w…”
Lemkin: Klaviyo will be worth close to $10 billion
“Klaviyo is going to be worth, I think, close to ten billion.”
Lemkin: Tech Market Will See an IPO Week in H2 2024
“I have a lot of money with Harry that it's an IPO week in the second half of twenty-twenty-four.”
Paley: True Startup Dilution Comes From Burn Rate, Not Financing
“Valuation is all the sideshow. The dilution isn't even your financing. The dilution is how you use your burn rate. That is where all the dilution lives.”
Paley: TVPI vs DPI disconnect will be among largest in VC history
“I would bet the last few years will be one of the biggest disconnects between TVPI and DPI for venture funds in venture history.”
Lemkin: Venture Capital Model Does Not Fully Work in B2B
“I actually don't think venture fully makes sense in B to B. I generally don't think it works”
Lemkin: Public tech leaders will increase headcount 20%+ next year
“I think average hiring will be like, 20% in public leaders next year. I think they'll be hiring 20% or more. I think layoffs are so far behind us. 20% or more I think the average public company will hire next year.”
Maples: Seed venture capital is about micro 'bird spotting' for novel startups
“Yeah, for me, the job is sort of like, you know, when you're in the Galapagos Islands and you spot some, Finch with a weird looking beak that nobody's ever seen before. Like, I think that's kind of what Eric and I try to do, right? We're trying to, but like, i…”
Paley: Founder Collective's 2010 investment SeatGeek will deliver an amazing liquidity event
“Like, SeatGeek was a 2010 investment. I think it's a great company. Dave led that for us. I think it's gonna ultimately have an amazing liquidity event”
Paley: Founder Collective owned 12.5% of The Trade Desk at IPO
“We owned, I think, 12 and a half percent of the company at the IPO.”
Paley: The Trade Desk Burned Only $7 Million Before Its IPO
“The company burned seven million dollars before going public.”
Maples: Selling Twitter Stock at $1B Valuation Was a Mistake
“And so I sold some of my Twitter stock at a billion dollar valuation. I regret that. I, that was a failure of imagination on my part.”
Maples: Don't underestimate strong product-market fit relative to other problems
“When a company has product market fit, that's a rare thing, and when they have strong product market fit, that's an extremely rare thing. It's like, don't underestimate how important that is relative to all other things.”