Aug 23, 2023 · 1h 12m · news
Jason Lemkin & Rick Zullo: How "Mark to Market" Corrupted Venture Capital | E1052 · 20VC with Harry Stebbings
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Host Harry Stebbings sits down with venture capitalists Jason Lemkin and Rick Zullo to dissect the structural corruption of modern venture capital, exploring how the shift toward a massive asset management model has ruined board governance, inflated valuations, and forced a painful but necessary industry correction toward profitability and financial discipline.
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 17.2% of the talking time here. How this is scored →
Harry as informed peer 4.6 Guest teaching 3.6 Guest disagreement 3.0 Harry pushing back 3.5
speaking balance: gold is Harry, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 8:30 Jason patronizes founders over cash management
Jason dismissively rejects the premise of seed dialogues around capital consumption, patronizing founders for running out of money despite receiving large seed rounds.
Hardest push from Harry ▶ 42:26 Harry refutes Rick's stance on startup pitchingHarry forcefully refuses Rick's dismissive framing of pitch practice, insisting that pitching excellence is a mandatory skill for founders to attract talent, capital, and customers.
Biggest teaching moment ▶ 32:57 Jason exposes the structural corruption of paper markupsJason provides an eye-opening breakdown showing how paper markups and LP compensation structures incentivized artificial VC fund valuation inflation.
Harry holds his own ▶ 1:02:23 Harry exposes the reality of competitive VC deal sourcingHarry demonstrates deep market expertise by dismantling the myth of collaborative co-investing and explaining why top tier funds no longer share quality deal flow.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Harry as informed peer | Guest teaching | Guest disagreement | Harry pushing back | Why |
|---|---|---|---|---|---|---|
| The Jerry Maguire Moment in Venture Capital | 2 | 2 | 1 | 1 | Harry introduces the episode by asking Rick about his comment regarding a Jerry Maguire moment in venture capital. Rick shares an anecdotal thesis on returning to high-touch, intimate founder relationships rather than scaling asset management funds. | |
| The Broken Mathematics of Mega Funds | 3 | 3 | 2 | 1 | Harry prompts Jason regarding his thesis that unicorn investing is dead for mega funds. Jason and Rick outline the return math constraints of mega funds needing $10B+ outcomes to move the needle. | |
| The Resurgence and Evolution of Mega Funds | 5 | 3 | 2 | 3 | Harry brings specific return calculations to question how $2B+ mega funds function. Jason offers a contrarian prediction that mega funds will resurge by late 2024 as market liquidity returns. | |
| Why Do Founders Spend All Their Capital? | 6 | 4 | 5 | 7 | Jason provocatively questions why founders burn capital when given larger rounds. Harry forcefully pushes back, arguing that founders spend capital to prioritize hiring speed, product expansion, and aggressive market testing. | |
| Layoffs as a Failure of SaaS Leadership | 4 | 5 | 6 | 4 | Jason takes an uncompromising stance that layoffs in SaaS are an utter failure of leadership. Rick directly challenges Jason's narrow perspective, asserting that RIFs can be productive and that VCs failed to provide necessary friction. | |
| Silence and Burn Rates: A Board Case Study | 2 | 3 | 2 | 1 | Jason recounts a story of board members being afraid to address high burn rates with a founder. Rick elaborates on board dynamics and the need for board members to explicitly opt into direct feedback roles. | |
| The Decoupling of Ownership and Control | 2 | 3 | 3 | 1 | Jason asks what control a cap table ownership percentage should grant investors. Rick explains how shifting market conditions and bridge rounds will force founders to listen to their boards more closely. | |
| Corporate Busts and Missing Salvage Value | 5 | 3 | 2 | 3 | Harry introduces a sharp premise that non-AI messy middle startups will experience total busts rather than structured down rounds. Rick concurs, explaining fiduciary responsibilities and salvage value recovery. | |
| The Rapid Profitability Shift in Public Markets | 3 | 5 | 2 | 1 | Harry inquires whether startup efficiency is a permanent shift. Jason educates on how public SaaS companies like Monday.com, Toast, and Snowflake dramatically pivoted to high operating margins within a single year. | |
| Reintroducing Financial Acumen into Venture Capital | 4 | 4 | 3 | 3 | Harry highlights the dilemma for founders who cut costs but saw growth slow. Jason firmly responds that the grace period for low growth is over and startups must return to triple-triple-double-double growth trajectories. | |
| Owning Your Destiny Through Profitability | 5 | 4 | 2 | 3 | Harry asks a direct question regarding how severely LPs should discount current venture fund paper books. Rick discusses secondary market pricing and the fallout for firms that over-leveraged SPVs. | |
| Pragmatic Markdowns and LP Responses | 6 | 4 | 4 | 7 | Jason casually suggests marking down a $50M ARR company valued at $1.5B by 50%. Harry strongly pushes back, arguing that a 50% reduction represents a severe markdown rather than being directionally correct. | |
| Toxic Incentives and LP Paper Compensation | 3 | 6 | 3 | 2 | Jason delivers a thorough breakdown of how paper markups and LP compensation structures corrupted venture capital incentives, creating unsustainable short-term IRRs. | |
| Restoring Trust Through Conservative Under-Promising | 4 | 4 | 2 | 4 | Harry challenges the idea of LP trust by pointing out that LPs see wildly divergent valuations for the same company across different GP books. Rick and Jason analyze anchor LP relationships versus transactional LPs. | |
| Substance Over Presentation in Startup Pitching | 7 | 3 | 4 | 7 | When Rick claims pitching is secondary, Harry forcefully asserts his view that founder pitching skills are mandatory to attract customers, employees, and investors. | |
| The Art of the Pitch: Strategic Self-Awareness | 6 | 3 | 3 | 5 | Harry presents his specific interview methodology of asking founders for the top three reasons he should not invest, arguing it tests strategic self-awareness rather than superficial salesmanship. | |
| Born Builders vs. Great Fundraisers | 6 | 4 | 4 | 6 | Rick describes his strict thesis-driven filter of taking only one meeting a week. Harry challenges Rick by pointing out that breakout companies like Monday.com, Pipedrive, and Salesloft did not look like life-changing outcomes at the seed stage. | |
| Underestimating Outcomes & The 3X Stair-Step Heuristic | 7 | 4 | 3 | 6 | Harry shares findings from interviewing lead investors of ten breakout unicorns, noting that every investor underestimated the ultimate exit size. Jason introduces a 3X stair-step valuation heuristic. | |
| Adverse Selection vs. Undiscovered Gems | 2 | 5 | 5 | 1 | Rick brings up potential adverse selection in valuation stair-stepping. Jason strongly refutes this narrative, citing his successful European seed investments and warning against pattern-matching biases. | |
| The Myth of High-Volume Sourcing | 6 | 3 | 2 | 3 | Jason asks Harry about his meeting volume. Harry details his sourcing model, explaining that he caps his personal founder meetings at three per week to maintain thorough diligence prep. | |
| Sourcing in a Competitive Venture Landscape | 8 | 2 | 4 | 6 | Jason asks about fund co-investing referrals. Harry candidly dispels the myth of VC collaboration, declaring that top firms no longer refer quality deals because the market has become purely competitive. | |
| Quick-Fire Round and the 2024 AI Market Bet | 5 | 2 | 3 | 3 | Harry conducts a quick-fire round on failure modes and market bets. Harry and Jason argue that VC dollar deployment into AI will double in 2024, successfully swaying Rick to concede his original down-market prediction. |
Statements from this episode (51)
Lemkin: A founder's primary job is to avoid running out of capital
“As a founder, your job is not to run out of money. If you got eight million instead of two million, it's not to spend it all.”
Rick Zullo: Asset management is a better business than traditional venture
“The asset management business is a better business than the venture business. You know, fees are guaranteed. Carry isn't.”
Lemkin: Every Elite Long-Time VC Has a $10B Outcome
“Everyone that's been doing venture for a while that is elite has at least one ten billion dollar outcome.”
Lemkin: Venture mega funds will resurge in late 2024 and 2025
“I think they're going to reflate at the end of next year. I think there will be a resurgence of mega funds in late 2024 and 20 25.”
Zullo: Venture capital will transition to asset management model
“But I think it's splintering off of professionalization of turning into asset management is really going to happen in venture in the next couple of years.”
Lemkin: Mega-funds displacing seed investors at inflated valuations is not new
“I actually don't think it's new. At least it's not new for second time founders, right? It's not new.”
Lemkin: Raising a $20M round after a $50M seed is extremely difficult
“If your seed's at 50, it's really hard to raise the next round at 20.”
Stebbings: Founders never bank 80% of raised capital to control burn
“But I've never seen anyone do that.”
Zullo: VCs misdirected founders by promising perpetual capital availability
“And I think a big part of this is the investor steering in the wrong direction and saying that money is going to be there.”
Lemkin: VCs bear 51% of the blame for startup overspending
“We did and I blame the VCs at least as much as the founders, right? I stipulated, 51% 49”
Lemkin took zero salary for 18 months to avoid company layoffs
“No, I took no salary for 18 months. Okay. I invested my own limited money from my first startup in my second.”
Lemkin: B2B SaaS CEOs should be embarrassed to conduct layoffs
“If you're a great SAS CEO, you should never have a RIF. It's called recurring revenue. You should have the ability to, I get it in B to C or D to C or X and Y and Z to C. I don't think good SAS CEO should, I think it's an utter failing to ever have a RIF unles…”
Zullo: VC board governance degraded into 'patty cake' over founder NPS scores
“We really moved away from that over the course of the last five, 10 years, because, like, just like you were talking about, like, there's a lot of incentive to sell sell a founder, a lot of incentive to be all about the NPS score, and everyone's trying to, you…”
Lemkin: Founders and Boards Will Regret Delaying Burn Rate Conversations
“In the end, people will have wished that conversation happened six to eight months ago, but ever the tenors changed. Everything's changed.”
Zullo: Founders want 'personal trainer' board members like Roger Ehrenberg
“Founders, they want a personal trainer. They don't, you know, they want someone who's going to make them better. And yeah, I think there's folks like Roger Ehrenberg are great personal trainer.”
Lemkin: Founders view 40% VC ownership as granting zero governance say
“Founders don't think of, Hey, I sold 40% of my company. That means they have a 40% say. I think a lot of founders think that means they have a nonce percent say, a zero percent say. I don't know what it is, but it ain't what it was five or even five or six yea…”
Zullo: Downturn will force founders to listen to boards or be fired
“And I think as you go and see a bunch of bridge rounds, down rounds, and all this other stuff that's going to happen in the next couple years, like, The reality is founders are going to have to listen a lot more to their board and because of the board doesn't …”
Lemkin: 95% of founders ignore investor relations until needing bridge capital
“I think that that dynamic is lost on 95%, not all, but 95% of founders.”
Zullo: Venture market will see more startup busts than bridge rounds
“I think there's gonna be more busts than down rounds and bridges.”
Zullo: Mega funds have no financial incentive to salvage struggling startups
“The salvage value and loss management really doesn't matter at those funds.”
Zullo: Top $2B+ funds won't invest in non-decacorn, lukewarm startups
“If it's not super hot or not going to be a deco core company, my guess is, you know, most of those top 10 venture firms that are over two billion are not going to be knocking on your door.”
Lemkin: Monday.com shifted operating margin from -10% to 20% in one year
“Monday.com went from -10% operating margins to almost 20% in one year.”
Lemkin: Snowflake is forecasting 45% operating margins going forward
“Snowflake's now predicting 45% operating margins going forward.”
Lemkin: Startup founders are out of touch with public market efficiency standards
“I think founders are out of the loop. What's happened in the public markets and founders are out of the loop about efficiency.”
Zullo: VCs and Founders Lost Financial Acumen Chasing Revenue Multiples
“Founders and investors, both we've kind of slipped away from financial acumen as investors, where it just became really focused on revenue multiples.”
Zullo: Many Consumer and FinTech Startups Died Cutting Back Growth
“I can point to a ton of consumer companies, a ton of FinTech companies that move the opposite direction that, you know, despite You know, trying to cut back their growth, you know, went through the floor and those companies are largely dead right now.”
Lemkin: B2B Startups Cannot Skip 'Triple, Triple, Double, Double' Growth
“You can't have, whether the venture outcome is three hundred million or a billion or ten billion, you can't avoid triple, triple, double, double, at least in B to B. You can't avoid it. You can have a year gap. You literally can take a year off, but you can go…”
Zullo: Secondary offers will reduce peer fund returns from 7x to 1x
“I've definitely heard some secondary offers on some big, big companies that I know that are going to turn Some of our peers from seven X funds to one X funds.”
Lemkin: Startup valuations above 15x ARR are suspect in current market
“First, I basically decided that anything north of 15 X ARR had a suspect valuation in the current world. Okay. That's what the top and this most startups are not going to be the very top. They're most aren't going to be data dog or snowflakes on the other hand…”
Lemkin: SaaStr took two portfolio markdowns after valuation review
“And I took two markdowns, right? From this process, but not 20.”
Lemkin: Portfolio markups have completely corrupted venture capital
“The way we've done markups, especially for smaller and other funds, has completely corrupted the industry.”
Lemkin: Personnel at large LP institutions are compensated on paper markups
“A lot of LPs Big, at the bigger LPs, they're compensated based on paper markups too. This is less well understood. They're compensated. This drove crazy. Where did all this unicorn explosion come from? People don't understand that the cash had to come from som…”
Lemkin: VC behavior driven by paper markups will return after market pause
“Maybe we took a pause on it briefly, but that corruption is going to come back.”
Zullo: Institutional LP capital for emerging VC managers has largely dried up
“All the emerging managers that have come to the game over the last couple of years, like we were all fighting for so much capital with each other. Like a lot of those doors are now closed.”
Zullo: Venture Investors Should Apply Discounting to AI Company Valuations
“Everything in AI, you should probably be taking some discounting on those rounds.”
Lemkin: Non-mega funds rely on a few anchor LPs; others are transactional
“Most funds, I mean, when you're big, it's different, but most funds that aren't huge have a few core anchors, right? They really do. And typically those relationships are trust driven, right? They are trust driven. That's why they're anchors. The rest, it is t…”
Lemkin: VC fundraising has returned to taking two years
“It has swung back to being hard as it historically was, right? It traditionally took two years to raise a fund, not, not an email.”
Lemkin: LP investing feedback loops are much slower than venture investing
“It's an easy job and that it's very, very slow, but it's very hard to get good at it, right? It's very, it's another order of magnitude slower feedback loop than venture, which is pretty slow.”
Rick Zullo says he hasn't taken a startup pitch in eight years
“I haven't taken a pitch in eight years because I think pitching is bullshit because I think it's all about sales, salesmanship and rather than actually like me understanding your understanding of a company.”
Jason Lemkin Refused Initial Pitch Meeting with monday.com Founders
“And I was on, you know, I did this catch up with the monday.com founders the other day and they showed me the pitch email they sent me. It was the worst ever when they were starting. It had a different name. It was terrible. It's like, We're thinking about doi…”
Lemkin: Saturated Software Markets Require Founders to Force Entry Through Salesmanship
“In B to B, you got to sell, man. No one needs another SAS product. We already have 11 payroll companies and 88 CRMs and 96 mark. We don't need one. So if you can't force your way into a market and Selling stock is sales.”
Rick Zullo: No correlation between seed fundraising skill and business success
“We just haven't seen a lot of correlation between the folks who are like really great at raising money at the seed stage and the folks who are really great at building a business and the people who are really great at building a business, they get pretty good …”
Jason Lemkin limits founder pitch meetings to one per week
“And I have, I only actually, I'll read a 50 emails a week, but I only want to do one pitch a week. I only, if I can, that's my dream. And I find when I do two, three or four, the other three aren't worth it.”
Zullo: Funds Can Achieve 10x Returns Without Decacorn Exits
“There are plenty, 10 X funds that haven't ever been in a deck accord. And like, I think Roger probably has a couple of mucker has a couple, you know Tim Connors has some monster funds that like, you know, certainly some big drivers in there.”
Lemkin: SaaStr Will Return to 'Stair-Stepping' Investments Needing 3x Markups
“And that's what I'm going to get back to, right? A stair stepping deals, just stair stepping them, right? Twenty million post fine, but I got to know it's going to be 60.”
Lemkin: VCs cannot do real work taking 50 founder meetings weekly
“I mean, you can't do 50 meetings a week, no matter what they say on the internet. You can't, you can show up with no work. You can show up with a cup of coffee. You can't really do the work for 50 founders a week, right? You can't really do 2000 meetings a yea…”
Stebbings: 20VC has shifted into a purely competitive fund model
“Truth is, and it's the hard truth and it's the ugly truth. We are just competitive now. We have to build a better product that competes with these firms.”
Zullo: Many multistage VC partners will leave their firms within 3-5 years
“I think the reality is the broken incentives that venture firms have of all these zombie VCs that are Series A, Series B, Series C at multistage funds, a lot of those venture investors may not be there three to five years from now. If you are building a compan…”
Lemkin: 'Good, not great' growth causes startups to fail raising Series A
“I think here's what I think the most common reason is they have good, but not great growth. This is the risk for seed investors, especially late seed investors. And I didn't used to want to think this was true. When I started investing, I did a whiteboard and …”
Zullo: Missing Archer Aviation showed the risk of rigid thesis investing
“Honestly, I'm incredibly thesis driven, and I've missed a lot of amazing companies because of that. I told the story around investing in the guys from Vetteri, and then, like, they started a public company in our office, and we did invest. You know, that compa…”